Understanding Market Value
As you contemplate buying and selling a foreclosure property, you’ll need to have a keen understanding of market value - not just in general, but specifically in the neighborhood where you’re investing and particularly for the property you’re looking to pursue. Market value is the value of real estate property and is determined by the current market along with many factors regarding the home. It is greatly affected by how many buyers are looking for houses in the area and how many houses are available.
As you are making observations and discovering the neighborhoods around you, try using comparison properties (comps) to get an idea of what price properties are selling for. As you find houses for sale, look at houses of similar specifications (square footage, number of bedrooms, number of baths, acres of land, etc.) and see if the price differs. Then look over the items below to determine why the prices of two similar homes may be so different.
Factors That Affect Market Value
The key to understanding market value is realizing that the value of the home will change as the demands change. As it is not the actual value of the home, market value is an agreed upon price that the seller is willing to sell the home for and a buyer is willing to pay. This price is affected by several different factors:
Location
Every market area has a high end and a low end and market values of the homes in these areas coincide with their location. If a property is located in the low end of town, buyers expect to pay less, even if it has the same specifications as a house in the high end. High end areas are typically closer to schools, shopping areas, areas of interest, transportation, etc. Low end areas are sometimes further away from these popular amenities or closer to areas that are not as popular, such as noisy highways, train stations or waste facilities.
Features
The features of the home, such as the style, age and size are all major determinants of what buyers will pay. Certain styles attract certain buyers and the age of the home can affect the value if it is newer or older than other similar properties on the market.
Condition
The upkeep of a home is a large factor in determining how much buyers are willing to pay for it. Areas that buyers are watching out for (and you should too) are:
- Paint
- Windows/Doors
- Floors/Floor Coverings
- Ceiling/Walls
- Plumbing
- Electrical Work
- Bathrooms/Kitchens (overall function and condition)
- Any needed repairs
Home Improvements
Look for recent home improvements that may have been completed on the home. Improvements may range from minor upgrades of fixtures and floor and wall coverings to major projects such as a room addition, new pool, or kitchen and bath makeovers. However, the impact on the property’s value ultimately depends on what the buyer sees as beneficial and desirable in their new home. A large swimming pool may not add much value if the market is filled with individuals looking for a home with a large yard.
Market Forces
Regardless of the home’s many features, large size, or excellent condition, if few people are looking for houses in the area and many are for sale, the selling price is going to be lower. On the other hand, when many buyers are chasing fewer available properties, selling prices increase. One of the mistakes in buying and selling foreclosures is overestimating market demand, and consequently paying too much and/or being unable to sell at a profitable price.
A Comparative Market Analysis is an excellent tool to help you better understand market forces and the market value of your target property.
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