Understanding property value: The multidimensional nature of real estate
Category Advice
For many people, the dream is to own their own home, and considering property has long been touted as a good investment on the basis that it's a tangible asset that appreciates over time, it makes good financial sense.
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However, to effectively capitalise on an investment in a dynamic marketplace, one has to understand the meaning of value in this context and be aware of the key factors which contribute to this value.
This is according to Arnold Maritz, Co-Principal of Lew Geffen Sotheby's International Realty in Cape Town's Southern Suburbs and False Bay, who says: "When discussing real estate, the term 'property value' is frequently tossed around, but its true meaning is often misunderstood.
"While many equate property value to the price someone is willing to pay, a deeper exploration reveals that it is influenced by multiple factors and methodologies. From market trends to physical attributes, each element plays a pivotal role in determining the worth of a property."
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Maritz lists the following as the core determinants of property value:
Location: Undoubtedly, location is the most significant factor affecting property value. A property's geographic placement dictates its desirability, influencing everything from daily convenience to long-term investment potential.
Proximity to amenities such as schools, parks, public transport, and business hubs and factors like good views can elevate a property's value. Additionally, neighbourhoods with lower crime rates and signs of economic growth are generally more sought after. However, it's essential to note that location's impact is immutable; it cannot be changed, only leveraged.
Property Size and Layout: The size of the property, including both the erf size and the usable space within the home, forms a fundamental basis for valuation. Whilst larger properties will generally command higher values, the layout also matters significantly.
A well-designed home that makes efficient use of space and volume can enhance value and features such as open-plan living areas, functional room configurations, and ample natural light also contribute positively.
Condition and Age: The physical state of a property is a crucial determinant of its market value. Properties that are well-maintained and free from major defects typically achieve higher valuations.
Regular maintenance is therefore vital to preserving value, as neglected small issues can easily lead to costly repairs and lower offers. The age of the property also affects value; while historical charm can add value, older homes may require more updates and repairs.
Market Conditions and Comparable Sales: Real estate is a dynamic marketplace and market trends and comparable sales offer insights into current property values based on empirical data.
The market approach involves comparing a property to similar recently sold properties in the area to estimate its value. Economic conditions, including supply and demand dynamics, influence these comparisons. A high demand coupled with limited supply typically drives up property values, while an oversupply can depress prices.
The Valuation Process
"It is important to note from the outset that property practitioners are not property valuers. There is separate legislation that governs professional valuers, as well as distinct qualifying and training criteria for them," says Maritz.
"A property practitioner's core responsibility and expertise lie in marketing property and negotiation between buyers and sellers. They do however need a sound understanding of the concept of value and of the different ways in which to estimate value, in order to be able to assist both parties."
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According to Maritz, valuing a property involves a blend of objective analysis and market insights and the three primary methods used are:
The Sales Comparison Approach: This method assesses a property's value based on recent sales of comparable properties. It is the most commonly used approach for residential properties.
The Cost Approach: This calculates the value based on the cost to replace or rebuild the property, minus depreciation. It's particularly useful for new or unique properties.
The Income Approach: This method estimates value based on the income a property can generate. It's most often used for investment properties such as rental apartments or commercial buildings.
"Each method provides a different perspective, and together they contribute to a comprehensive valuation."
Enhancing Property Value
"Renovation and upgrades are an excellent way to enhance a property's value, but not all upgrades are equal so it's important to do one's homework to avoid over-capitalising.
"Every area has a ceiling price, which is the highest price the market is willing to pay and there is no point making improvements that will raise the sale price of your home beyond its market value."
Maritz adds that for those looking to sell, adding value to a home before listing can be a wise strategy, however, he cautions against over-improvement.
"Simple improvements such as thorough cleaning, minor repairs and cosmetic upgrades like new taps and kitchen cabinet doors can make a property more attractive to buyers and should be considered by anyone selling a home, especially if it's an older property.
"However, whilst larger renovations, like converting a garage to a granny flat can yield substantial returns if aligned with buyer expectations and market conditions, it's best to consult a property professional who understands the local market to determine the best upgrades to make."
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While it's impossible to look into the future and make 100% accurate predictions, Maritz says that there are a number of steps one can take to determine 'good value' and minimise the risk when buying a property:
- Check proposed development plans in the area;
- Check actual selling prices in the area over the past two years;
- Check the title deed for restrictions;
- Visit the area at different times of day (morning commuter, lunchtimes and evening, plus late night);
- Talk to a reputable agent about current trends in the area;
- Look at the proportion of houses under renovation vs the number of houses in poor state of repair;
- Aim for the worst house in the best area;
- Talk to locals.
Maritz concludes: "In essence, property value is a multifaceted concept shaped by location, size, condition, and market conditions and understanding these factors provides a clearer picture of what drives property worth. And while market value reflects an estimated price based on data and analysis, the investment value or worth is more subjective, varying based on individual needs and perspectives.
"One also has to bear in mind that real estate is essentially a medium to long-term investment, and that fluctuations are inevitable as real estate always has and always will work in cycles of boom times and correction periods.
"But if you've done your homework and also consulted with a property professional you will have significantly minimised the risks. And, remember, that there is always a buyer for a well-priced property."
Author: Property24