You always want to get top dollar for a property you’re selling, and you want to buy a property for as low a price as possible. Plenty of factors are under your control, both for boosting sales price if you’re the homeowner and by understanding what can bring a property’s value down if you’re the homebuyer trying to negotiate a better deal. Find out five factors that affect property value.
1. Market conditions
Although you have no control over whether it's a buyer's market or a seller's market (or if it’s balanced between the two), you can use the current market condition to determine your investment strategy. Timing the real estate market is no different than timing the stock market in this sense: You want to buy when prices are low and sell when they’re high. The real estate market is generally easier to time than the stock market since it doesn’t typically move as quickly.
The real estate market is always trying to achieve balance: equilibrium between being a market that favors neither buyers nor sellers and is based mainly on the property. A balanced market typically occurs when there’s a four-to-six-month supply of homes for sale, meaning that if no new homes enter the market, there would still be enough available homes to last four to six months.
Less supply with increased buyer demand makes it a seller’s market, and more supply with decreased buyer demand makes it a buyer’s market. Property value rises during a seller’s market and falls during a buyer’s market, so investors are wise to go with the flow of the market by buying investment property during a buyer’s market and holding it until a seller’s market happens.
2. Location of the property
The most important aspect of a property is its location because the land the property sits on cannot be moved. Investors might sometimes choose to move a house, but that isn’t the norm.
Location can add value to the home when the property is centrally located (residents can walk to amenities like the city center, the beach, or another attraction) and the neighborhood is safe with good schools, not to mention if the area is up-and-coming.
Investors can get a deal if they take a risk by buying property that doesn't look appealing now but looks as if it might have potential in the future. For example, if the neighborhood is currently crime-ridden but signs of new development are occurring (gentrification), what was once a bad location could be a good one in the future. Of course, no one knows what the future holds, and that’s where the risk comes in.
3. Size of the property
The size of the property affects its value. Number of bedrooms and bathrooms as well as square footage all affect home price, with a bigger house usually meaning increased home value.
But lot size is usually even more important than house size when valuing a property. The reason is that a house is considered a depreciating asset -- you need to maintain it for it to hold its value. Land, on the other hand, maintains its value and often appreciates just by nature of being a finite commodity.
4. Condition of the home
Although homes that haven’t been maintained can often be renovated or repaired, until they are, their value will be diminished. The longer a house goes without proper maintenance and repairs, the more its appraisal value drops.
A properly maintained home is one in which the electrical, plumbing, heating, and air systems work properly, the windows and doors are intact, the foundation is sound, the roof is in good condition, and the exterior looks good (no wavy siding, peeling paint, poorly hung gutters, or mildewed wood); in addition, it should have landscaping that allows water to run away from the property and no water seeping into the basement or crawl space.
Upgrades to a property have the potential to increase the property’s value. But not all upgrades are created equal. In fact, what some people consider to be an upgrade can actually decrease the home's value. For example, an addition to the home that was completed without the proper permits will probably need to be torn down, thereby decreasing value. The same goes for a garage that’s been turned into a bedroom. While an extra bedroom can increase value, if a needed home amenity is sacrificed, such as a garage that most people want, this could decrease value.
Upgrades that tend to increase a property’s value include finishing a basement, creating an open floor plan that allows in more natural light (making sure the structural integrity of the home isn’t compromised), upgrading the kitchen and the master bathroom, and increasing the curb appeal -- such as by adding professional landscaping, a new garage door, and stone veneer instead of vinyl siding.
The Millionacres bottom line
You can control much of what affects a property’s value. By making wise decisions on what you buy, maintaining your investments, and timing the market correctly, you can be a successful real estate investor.