Problem Solution
The underlying property has four-bedroom and has a swimming pool and can be valuated using the sales comparison approach. Three similar properties have been identified in the locations that were recently sold. The five-bedroom home does not have a swimming and was valued at $310,000. The four-bedroom property does not have a swimming pool and has been valued at $301,000. The third home to be sold recently is a three-bedroom house with a swimming pool, and valued at $334,000. The first step is to assume all the homes have a swimming and making adjustments to their prices to suit that of a four-bedroom with a swimming in order to find the adjusted price at which the home can be sold. Adjusted price in this case is the price a similar home with the same features as the property under consideration will sell at normal market conditions.
The first step is to make adjustments to the first property by subtracting the cost of one bedroom and adding the price of a swimming pool. Adjusted sales price = $310,000-$12,000+$25,000, which makes the adjusted price for this property to be $323,000.
The second home has four bedrooms but does not have a swimming, so the adjusted price requires adding the value of a swimming pool. Adjusted price= $301,000 + $25,000 = $326,000.
The third home is a three bedroom house, but this one has a swimming pool, so its adjusting requires adding the value of one bedroom to its value. Adjusted price = $334,000 +$12,000 = $346, 0000.
Once the adjusted value for all the three properties is determined, the average of the adjusted property prices will be found to arrive at the price estimate of the four-bedroom home with a swimming pool. Estimated price = ($323,000 + $326,000 + $346,000)/ 3 = $331,667, is now the price of a four bedroom with a swimming. However, the price of a four-bedroom house can be taken to range from $323,000 to $346,000, with the differences in prices attributed to other factors apart from swimming pool or the number of rooms. However, this case does not involve other important factors in valuation such as location, which has a significant impact on the home price.
Valuing a Home
Introduction
The greatest challenge facing real estate industry is the determination of the value of a home given the many factors that have to be accounted before arriving at the fair value of the home. The value can be based on estimation which is based on important aspects such as the size of the house, location as well as the amenities inside the home. Buyers base their purchase on rationality usually considering the lowest price, or the highest feasible value for a home. On the other hand, the seller determines the fair value of a home before they make sale decisions. The efforts and advice of an appraiser are needed to help ascertain the price for the underlying property in the market. Fair market value is what will cost a buyer to acquire a home once the market is not influenced by factors outside demand and supply. Estimated home value is discussed in this paper and explanation of how it is conducted by trying to appraise the price of a four-bedroom house with a swimming pool based on values of three other properties that have been sold over the recent past within the same locality as the underlying property.
Estimated Home Value
Estimating the appropriate value of a home is critical to enhancing quick sale. Besides, estimating the price reduces the possibility of inflating the price because both the buyer and the seller are aware of the current pricing. For this estimation to be effective, various factors have to be considered such as external features of the property, internal features, prevailing demand and supply in the property market, as well as the location of the underlying home (Tajani, 2019). The external features are those observable features seen from outside the house, which includes the art design, size of the premises on which the property is located and its proximity to a road network. The internal characteristics include size of the rooms, number of rooms, finishing designs; appliances installed in the building, heating facilities, as well as ventilation features. The demand and supply are the forces within the market which determine the price of the home. Demand in this case is the number of homes the customers wants in the market related to supply levels. On the other hand, supply is the number of homes available in the estate industry market at the prevailing market prices. If the supply exceeds supply, the prices of property will be lower in order to discourage construction of more homes, and if the demand is higher than supply, the prices will be increased in order to discourage excess demand. The last factor to be considered in the valuation is the location because it has a great influence on the value of the property. Location dictates the price because different premises offer varying levels of prestige and comfort. As a result, homes in a prestigious location will be more expensive compared to those in remote areas such as the rural areas.
Why estimate the value of a home
The valuation of a home is necessitated by various reasons. One of the reasons is to determine the value of buying or selling a home. Valuation makes it easy to set an appropriate price to the underlying property making it competitive in the market. On one hand, a buyer wants to get the value of the money, and on the other hand, the seller wants to recover their investments and earn interest out of it. Financing institutions, especially those operating in the mortgage market will require valuation of the property before they give out their money (Sorenson, 2010). Lending institutions are only willing to give out mortgages if the property under consideration is enough to recover their money and the required interest in case the borrower defaults payment. Employers at times may transfer their employees to new locations, in which case they should help them to relocate by purchasing their home to ensure the employees are able to locate without affecting the operations of their organization. This makes the valuation process important in order to enhance effective selling and purchase to be conducted based on the value of the property. Other reasons why valuation is required include tax assessment, insurance compensations among other reasons.
Determining Estimated Value of a Property
Sales comparison approach has been deemed the most appropriate method of assessing the value of a home. This method can be used by professionals as well as real estate dealers to determine the appropriate value of properties. The sales comparison approach is based on relating other properties in the similar location to find an estimate of the value of the existing property (Mettling, 2019). Sales comparison approach has to consider at least three properties that have been sold recently within the locality of the property under consideration. However, the problem with this approach is identifying another property that can be compared to the home. Since it is hard to obtain properties that are identical to the property under valuation the appraiser need to consider comparing the home with other similar homes even if they are not the same to make sound approximation of the value. The measures that appraiser will require include area covered, age of the property, and the premises of the home. There is need to compare a number of homes because the homes are not always identical by finding the adjusted price for each of the properties. The adjusted price is taken to indicate the price at which a similar property would sell if it had similar features to the property under consideration.
Information regarding such properties is readily available in sources such as real estate agents’ databases, property dealers, and property magazines on properties that have been dealt with in the past. Local as well as municipal authorities are other sources that can provide property data. This can be also be obtained from local assessors since they are better placed to give information that shows the price of similar homes which can be used for comparison purposes.
Other Valuation Models
Some of the models that can be used in the valuation of a home include the technology based approaches such as the automated valuation model. This model offers a certain level of accuracy and is a milestone to the extent the technology is changing the property market. In case the accuracy of the model is in doubt the Federal House Financing agency price index can be compared to determine the accuracy of the model because it applies a more scientific approach called repeated sales method (van de Minne, 2019). This method considers the market changes that influence property prices. Besides, property brokers can be used to provide the value of a home based on their experience in the field.
Conclusion
People are in a race to acquire a home, although owning one has been a major concern in many region of the world. All governments are proposing and enacting policies that will improve welfare of its citizens by creating an environment that will make it easier for them to afford a decent home. The real estate industry has grown rapidly in response to the increasing demand for housing. As a result, home valuation is becoming an important aspect because the buyer would want an affordable home, while home sellers are competing to win the market. Home valuation is becoming a critical aspect of life for everyone who dreams of owning a home in their life time.
References:
Mettling, S., & Cusic, D. (2019). Principles of Real Estate Practice. Performance Programs Company.
Sorenson, R. (2010). Developing the Appraisal Review Opinion. Appraisal Journal, 224-250.
Tajani, F., Morano, P., Salvo, F., & De Ruggiero, M. (2019). Property valuation: the market approach optimised by a weighted appraisal model. Journal of Property Investment & Finance.
van de Minne, A., Francke, M., Geltner, D., & White, R. (2019). Using revisions as a measure of price index quality in repeat-sales models. The Journal of Real Estate Finance and Economics, 1-40.
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