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Deconstructing the value of real estate
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Real estate has long been touted as a good investment on the basis of property having excellent value. In order to capitalize in a dynamic marketplace, one has to understand the meaning of value in this context and the key factors which contribute to this value. Secure estate specialist for Lew Geffen Sotheby's International Realty in Constantiaberg, Steve Thomas, says when broadly defined, real estate is the value of the land plus the improvements upon it. The resources beneath it and the rights above it, without which the former has a basic, unenhanced intrinsic value with minimal benefit or yield. And in determining value, many people attribute a lot of weight to the rand per m2ratio and, while it is certainly one factor, it's far more significant to those who view real estate from a purely investment perspective. "A homeowner gains enhanced value over time while utilizing the property as a place to live; the primary function, while the investor seeks only enhanced value or highest financial return over time as the primary function." So what factors must one then take into consideration when determining the true value of real estate? "Certain elements are fairly standard and easier to ascribe a value, for instance the number of bedrooms and bathrooms, the size of the plot and the age and condition of the home," says Thomas, but one cannot disregard contributory value which can significantly influence the equation. This refers to the contribution made by particular features to the overall value of the whole property and is often discussed in relation to renovations or improvements which include a wide range of upgrades or additions, for instance adding a garage, a deck or a granny cottage." Thomas adds, one cannot ignore the external influences such as proximity to good schools and amenities and cautions against over capitalization. "Original price paid plus improvement investments over time at a percentage growth does not always add up to the sale price achieved at the end of the day. "It's a very fine art to mix these qualities into a property in such a way that the majority of buyers in that sector of the market will see true, worthwhile value. "Essentially, real estate which has been 'improved' can provide not only enhanced value but also 'yield' from, among other things, rental income." When one wonders why the price of two very similar houses can vary considerably, Thomas says one can break it down even further by valuating factors such as: the quality of build and finishes, special features, location, views, lifestyle, security, surrounding neighborhood and homeowners' association capabilities and cost. While it's impossible to look into the future and make accurate predictions, Thomas says there are a number of steps one can take to determine 'good value' and minimize risk: Check proposed development plans in the area; Check actual selling prices in the area over the last 18 months to two years; Check the title deed 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; 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. One of the important factors to understand that different people and parties; perceive value in different ways. Just the same as a bank sees value in terms of recoverability of its bond advance in the event of a default, one person's idea of a view is another person's idea of a security risk. Also bear in mind that real estate is essentially a medium to long term investment, but if one has done one's homework and researched the value of a property properly fie minimized risk, then try not to be swayed by fluctuations. Remember that fluctuations are inevitable as real estate always has and always will work in cycles of boom times and correction periods," says Thomas.
Author: Lew Geffen Sotheby's International Realty