4 Factors That Influence A Residential Property's Value
Most people are content with the idea that home values rise over time
. To be sure, this is a reasonably accurate point of view. It is supported by decades of residential real estate market data that show upward-trending prices. The problem is, this view encourages a common misconception regarding the factors that influence a property's value. In this article, we'll clarify this point and describe the four main elements that drive valuations.
Focusing On Land: The Limited Resource
Most of the confusion among beginning investors and homeowners is based on a widely-held fallacy: a house increases in price over time. In reality, the opposite is true. Much like an automobile, houses depreciate. They lose value. Assuming this is true, what causes the valuations of residential properties to rise? At its simplest, the answer is the land underneath the structure.
The ground on which a house is built is limited. As Mark Twain was reported to have said, "buy land - they're not making it anymore." As a result, land is considered a valuable, coveted asset. For many people, this concept marks a radical departure from the manner in which they have traditionally viewed their home's appreciation. But it leads to a much better understanding about the forces that influence a property's value.
1 - The Size Of The House
All other things remaining the same, a smaller property will provide a higher return on investment than a larger property. This assumes both properties are located in the same neighborhood on similarly-sized plots of land.
Let's suppose the smaller house is half the size of the larger one, and is valued at half the price. As the land underneath both houses appreciates, both houses will do so, too. The difference is, because their respective values are increasing by a similar amount, the investment return on the smaller home is nearly twice that on the larger one. Note the appreciation has little to do with modifications (i.e. upgrades) made to either structure.
2 - The Location Of The House
It comes as no surprise that a property's location plays a significant role in its value. This is true not only for properties located in certain cities, but also their locations within their respective communities. For example, houses that are located in the furthest recesses of a dead-end will have a higher valuation than those located on a busy street. Those near schools will also enjoy higher valuations.
3 - Growth And Development
Development near a given residential property has an enormous influence over that property's value. If malls, restaurants, hospitals, theaters, and similar structures are planned for the community, homes for sale in that area will attract higher bids from potential buyers.
4 - Age Bracket Of Homeowners In The Area
The ages of people who live within a community cannot technically be considered an influence on real estate valuations. But they can be used as a gauge of how well residential properties in the area might be expected to appreciate. Why? Because new homeowners with young families suggests public schools are nearby. The presence of public schools in a community lift residential property values.
Ignore The Aesthetics Of The House
You'll notice that the factors described above have little to do with the physical house that stands on a property's parcel of land. This implies that changes to the veneer of a home make little difference to the future appreciation of the property itself. While installing a new roof, hardwood floors, or new countertops will increase a home's value, such upgrades do so as the result in a capital injection. They do not play a significant role in whether the property appreciates.
If you are looking at homes for sale solely for the purpose of living in the home, the above discussion has little bearing. If, however, you are interested in watching your property appreciate over time, realize that the appreciation is ultimately driven by the land underneath.
by: Mary Mumford
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