When talking about their homes, people often say they got the property at good value for the price or say their house is valued at a certain price–but what do the words “price” and “value” actually mean?
Price and value are words used interchangeably in real estate but they have distinct differences you need to take note of to help you make informed decisions on your property investment.
It’s understandable to be attracted to a low price listing but that investment may not be worthwhile in the long run. Property that may seem like a bargain comes with what often plagues cheap real estate like a bad neighbourhood, high crime rate or dilapidated infrastructure.
Price is one factor to consider when scouting for real estate but you should look at properties that are worth it and pay attention to red flags on listings. Not every property is priced according to their fair market value, leading to some of them being overpriced, costing you thousands more dollars than what you want to spend. On the other hand, underpriced properties, while attractive, will often cost more in maintenance, repair and upkeep.
It’s important to remember that a property’s value is not always equal to its price and you have to pay attention to that when purchasing.
The difference between price and value
Price is the amount set for purchase of the property. This is the number you see in listings and is what the owner hopes to receive for selling their home. This rate can still change depending on market conditions and any negotiations you’ll have with them.
The price doesn’t include ongoing fees you will have to pay when you have invested in the property. Some costs you can expect are:
- Stamp duty
- Conveyancing fees
- Legal costs
- Search fees
- Pest and building reports
You also need to pay a property mortgage if you borrow to invest (with a property loan), because relying on rental income to cover this expense doesn’t account for costs when your home is empty.
Value refers to the fair market value, which is how much the property would sell for on the open market given the conditions below. Unlike price, the fair market value is more challenging to define because it’s an accurate assessment of a property’s worth, which isn’t always easy to determine.
In order to calculate the fair market value, you need to make sure that all parties involved are:
- Aware of all facts around the property
- Acting out of their own interest
- Not pressured to buy or sell; and
- Given enough time to make the decision
When scouting for your investment, you should consider the fair market value of the property and compare it to the asking price to determine if the property is fairly priced or not.
3 ways to differentiate value from price
Sorting out the value relative to its price may seem daunting, but with the right resources, you can make informed decisions before you invest.
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Do a competitive market analysis
A comparative market analysis is a detailed report on a home’s present value, commonly prepared by real estate professionals by comparing sale prices of similar properties in the area. This report provides you with the property’s fair market value, allowing you to compare this value with the seller’s asking price to determine if the property is overpriced.
It helps to request a comparative market analysis when viewing properties for sale to know the actual value of the property relative to the seller’s asking price.
You can put together this report yourself through a five-step process:
- Learn about the neighbourhood in terms of historical, current sale and rental value, as well as proximity to parks, schools and other amenities because convenient access to these increase your home’s value;
- Pre-assess the listing property online and take note of details like when the property was built, its home and lot size, architecture and condition;
- Assess the property in person, noting important metrics, such as size, layout, age, condition, finishes, and landscaping, as well as issues like areas for repair hidden from the listing like a damaged roof or lack of central heating;
- Select comparable properties in the area, narrowing details based on when the homes were sold, where they’re located, number of bedrooms and bathrooms and what the other spaces’ main features are, and;
- Summarise and collate the data to get your comparative analysis report.
Hiring an appraiser or real estate agent is also a great, convenient way to get this report.
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Calculate for the expected appreciation
Like any investment, calculating for the expected appreciation can help you determine whether or not the property is worth its price in the long run. Appreciation is the increase in the value of an asset over time. Depending on the location, market condition and situations happening inside the neighbourhood, the value of the home can appreciate over time.
Appreciation happens when there is planned positive development, like a shopping centre placed in the area or a large company moving into the neighbourhood. An approximate calculation for this is derived by using the following formula:
Future Growth = (1 + Annual Rate)^Years
Future Value = (Future Growth) x (Current Fair Market Value)
Here’s an example: An investor considers a property with a fair market value of $799,756 and plans to maintain it for five years before selling. Calculating with a growth rate of 12.5% per year, the future value is $1,439,561.
Future Growth = (1 + 0.125)^5
Future Growth: 1.80
Future Value = (1.80) x (799,756)
Future Value = 1,439,561
These figures are used with current median prices to provide you with an idea of what your investment can return in a specific amount of time. Real estate appreciation, while helpful in making decisions, is still just an estimate so it’s important to contact an appraiser or real estate agent who can provide a detailed calculation of your property’s appreciation value in the next few years.
Appreciation can add value to the property’s worth, which can be compared to its price (provided by the seller) to understand if it’s a good investment or not. Knowing the future value of the property can help you determine whether you should buy the home or consider other options.
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Ask a real estate agent for help
A real estate agent can provide all the documents needed to assess the value of the property, making the process of comparing and compiling information less tedious.
Professionals are guaranteed to put together competitive market analyses and calculate expected appreciation, so you can rely on them for accurate information. They compare fair market value to the selling price and advise you on whether you should negotiate a lower price for a property since they have the benefit of prior knowledge and understanding of the market.
A good and experienced real estate agent will have the expertise and experience to provide sound advice on property investments.
It can be confusing to distinguish price from value, especially because they’re used interchangeably so often. However, if you understand the distinction between two of the most used terms in real estate, you’ll be able to better understand what you are likely to pay for your property.
Or if you want to take the guesswork out of the process hire a knowledgeable and experienced real estate agent to do the hard work.