Real estate refers to immovable property, usually land and buildings. Like any other property, it is important to assign a value to it. However, unlike other assets like penny stocks, for example, real estate is different because every real property is unique. For this reason, each property has to be assessed to determine its value in a process known as real estate appraisal. An appraisal is, therefore, an unbiased estimate of the true value of real estate.
Where do you get your real estate appraised?
A trained professional, who is also supposed to be licensed by the governing body in your area, should do a real estate valuation/appraisal. These professionals undergo training where they learn to identify all the factors that may affect the value of real estate property. Most appraisers will also work for a registered Appraisal Management Company (AMC), which is also heavily regulated by the relevant authorities. However, no appraiser will be completely objective, and that is why they are supposed to provide a detailed report that led to the concluded real estate valuation.
The job done by the appraisers is crucial to the economy as it determines the value of real estate within an entire region. This is why they are so heavily regulated. There are even proposals to form an international appraisals body that will prevent cross-border irregularities.
Nevertheless, real estate agents will often conduct their own appraisals for property they are hoping to sell. This is usually just a rough estimate conducted by considering the factors below. Although it is not an accurate valuation, it may still have an impact on the value of surrounding real estate, as you’re going to see.
Factors that affect the value of real estate?
Location, location, location
The most important attribute to the value of real estate is where it is, especially considering that it is immovable. The location determines a lot about real estate, and it is a combination of these factors that make the location such a key factor in real estate appraisal. To simplify these aforementioned factors, we can combine them into qualitative and quantitative aspects.
Qualitative aspects determined by location
These are the factors about a certain location that improve the quality of life for the person living in the real estate property. For example, the presence of ample security can make one location more valuable than another one whose security is not as good. People will always opt to live in a safe neighborhood, and they will pay more for it. Another common factor is social amenities like schools, hospitals, etc. All these are the additional facilities which are needed to improve the quality of life.
Quantitative aspects determined by location
These are the factors whose impact you can estimate in financial terms; in short, these factors attempt to convert real estate to an investment. Say, a house is located within an area that is being gentrified, that house is definitely going to have more value than that one located in an abandoned neighborhood. These same factors can also include risk factors like weather conditions, which explains why houses are cheaper in flood-prone areas.
The market conditions
Forces of supply and demand will strongly affect the value of real estate, where prices go up when there is a huge demand. A good example of market conditions in action can be observed in the US before and after the real estate bubble that burst in 2008.
Quality
This is pretty straightforward – a better looking real estate property will, of course, be valued higher than one which isn’t so appealing. Besides the aesthetics, structural factors also come into play, and they too must be taken into account. Some real estate properties become highly priced for special aspects like a famous previous owner, which only adds to the quality aspect.
Historical prices
The previous price of real estate will be the most significant factor affecting its current value. All the previously discussed aspects are abstract, leaving the previous market price as the only actual figure value. Think of real estate like art – its value is determined as soon as it is first sold. Therefore, if a piece of land was previously bought for, say, $1 million, then that would be its average value.
Why does real estate need to be appraised?
The job of real estate valuation is done for the benefit of the buyers and sellers of real estate. As a buyer, you want to get the most accurate valuation for a real estate property to avoid being overcharged. On the other hand, a seller may need to have their home appraised so that they get paid the actual value of their property. It really is a mutually beneficial process that also provides a lot of benefits.