Understanding Property Values - Before Investing

May 1, 2009 in Property Investment by Kez

Knowing the kind of returns property investment can be tempting enough for anyone to put a significant amount of savings into the property market. This hasty approach can quickly cause the erosion of your hard earned money instead of compounding it if the investment is not made correctly.

Although the property market has the potential to give a good return on your investment, it can be risky if you do not understand the basics of this volatile market. So before you dip in your pocket, remember that the most important thing to succeed in property investment is to understand the value of the property being purchased. It takes a decent amount of well informed research and some experience to be skillful enough to associate a fair value to the property. Taking note of the following basic information will assist you in taking an informed decision.

The best way to arrive at the ballpark figure of the value of the property is to compare it with the recent and current sale price of similar properties in the area. The word which is used in the world of property for sale prices is ‘Comp’ (short for comparable). Once you zero in on the property that you want to buy, compare its price with comp of similar properties (both currently on sale and previously sold). If the listed price is near the comp then you can be practically sure that you are getting the right deal. But before you go celebrating, make sure that the property you are buying is similar in characteristics to that of the comparable properties. In other words the properties you compare against have similar internal characteristics such as the number of rooms and size, similar external characteristics such as garage, garden and parking and the actual condition of the property is similar too. For example, if the property being sold to you is at the higher price than the comparable property and has some extras like a swimming pool, a landscape or extra parking spaces/ garage then the asking may be reasonable.

If the listed price is a significant departure from the comp then you should brace yourself to do some micro comparison. Other factors can also influence the price difference. For example if you do not have the luxury of finding similar properties on the same road for comparison then you may have to look at the next closest road and those properties can quite well vary in price due to factors such as amenities and the local surroundings. You should look more closely at the amenities local to the subject property you are looking to purchase.  Check if the property you are buying has extra amenities features and assess the cost of these extra amenities which are being provided to you. Pick up two properties from the recently sold and current on sale properties which are similar in all aspects and see if the price varies between them due to the local amenities to gauge the way the properties are priced. 

You will also need to take account of current market trends and whether the property market trend is lending itself to lower o higher property prices compared to similar properties in the past. Market trend is a very important factor influencing property prices. The same property that was sold a year ago may well be priced higher if the property market has appreciated in value since then. Conversely the market may be in a correction phase and the same property could be worth less in the current market, so make sure you take the market trend into account.

The process of property valuation may sound simple in theory but to apply it you must have as much information as you can about the homes recently sold or listed for sale in the market. A serious property investor should continuously research the market for the trends in the price by visiting the properties, following property advertisements in news papers or online.

Once you have done enough research into the property market and once you learn how to associate a fair value with a property, you are ready to take a plunge into the world or property investment.

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