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Factors that don’t affect the value on the real estate properties

03/10/2009
Factors that don’t affect the value on the real estate properties

When a house is sold, there are many factors that affect its value in the market and the temporary sale´s price of a house, like the location, condition, size , services, characteristics, improvements and upgrades, the local economic conditions, the actual real estate market and the mortgage interest rates, among others. Some of these factors are under the owner’s control, and others are out of control.The definition of the Fair Market Value includes several terms such as: the most probable price that a house must share in an open competitive market under all of the required conditions to a good sale, the buyer and the seller, each one acting with prudence and with knowledge; assuming that the price will not be affected by illegal incentives; the period of time or normal marketing; informing the buyer and the seller.To help the owners to have an estimated market value for their home, the real estate can offer a Comparative Market Analysis (commonly known as CMA in Spanish). A detailed Market Analysis must include full details of the property and information of the prices of the most of the comparable properties that actually stand out in the market for sale, in the wait for a sale agreement where an offer has recently been accepted, close sale operations, and expired lists, those that haven’t been sold during the marketing period. The purpose of a report like this is to give the owner information on the facts to help in his decision to sell by a recommended price and the estimate sale price. As long as there isn’t 2 identical properties, you can offer the owners an analysis like this as the most reliable method to obtain an estimate market value for their home.However, is very common for the owners to question the recommendations on the prices and the estimate market value. The questions and worries that the have on the prices, in the meantime they validate their situation, don’t have an effect on determining the market value of the house. Which are some of the factors that don’t have an effect in the market value establishment?The Price that used to be paid for a house one, three, five or ten years ago, has nothing to do with the home value now a days.There are real estate values in a fixed point in time. A home could have been bought for 300,000 usd three years ago, and today it can have a value of 315 thousand. Five years ago, a similar house could had been bought for  250 thousand usd and today have a value of 315 thousand. It’s about a drastic difference in the full estate in a relatively short period.The property of the real state has been blessed with recognition from the house values, but this recognition has not always been in a straight line.  The values on real estate are not always statics. In a long term, a real estate investment is generally considered as the most valuable type of investment, one of the best financial performance. It’s probably the best investment people can do in a long term.Depending on the conditions on the market when the house was bought, some owners were lucky and bought their house in a buyer’s market before the raise of the real estate values, as was seen recently in 2001 and the beginnings of 2006. Others could have bought in the end of a real strong market and were forced to pay a high value in a highly competitive seller’s market, like the many owners are experiencing now that they have purchased their house in 2006. It’s the conditions of the economical market, the economy, the employment, the types of mortgage rates and the offer and demand what generates the changes and make the real estate values to raise, remain stable or maybe drop in different periods. These factors are out of the seller’s control.All of the owners wish to get the Price that they feel they must get from their house when they decide to sell it. The reality is that their house is worth what it’s worth, and that’s the price that a buyer is willing to pay. A buyer will not pay more for a house than what he/she would have to pay for another house in similar characteristics, comforts, and location, something called the “replacement principle”. It is due to this reason why people trust so much in sales data when establishing a market value, and not in the personal emotions or personal circumstances.So even when a house was bought 25 years ago, 3 years ago or last year, the purchase Price was a value when it was bought and has nothing to do with its actual market value when it’s sold again. A seller with 25 years of the property and the fairness have the same right to the right market value than an owner with only 3 years of ownership of the property and maybe little or nothing of fairness,The sale decisions can be more difficult for the short terms owners, especially when the values have not increased or decreased since the house was bought. The owner’s of short term properties may have mortgage balances higher to the value of the house and a sale would require to put money in cash to redeem the mortgage payment. The owners of long term properties and substantial fairness may have an easier decision to sell that the owners that sell their houses without the benefit of the real estate recognition.In both cases, the real estate market is the market, independently of when the house was bought and the house is worth what it’s worth. If it is true that the house condition has an effect in its market value, and that a house with a good maintenance will sell with a higher value than a house that needs repairing, the real cost of making the repairs and improvements should not be equal to the market value raise. Why? The cost is not necessarily equal to the value in real estate. The repairs and the improvements are two different things.A repair corrects something that is broken of doesn’t work correctly, and doesn’t add necessarily value to a house when it’s fixed. Some types of repairing are considered needed repairs. A dripping faucet, broken windows, obstructed drains, screens with holes, channels hanging from the ceiling, among others are examples of this.Repairs like these are considered recorded maintenance, and are considered minor repairing. They are related with the maintenance and are easily noticed by the buyers. They call up attention and become a distraction to the buyers when they go and see a house. If you’re not careful, conditions like these will definitively have a negative impact in the marketing of a house, which will later have a negative effect on the market value. When repairing of fixing these kind of things the house becomes more marketable, not necessarily more valuable.In other words, only because these repairs cost 150 dollars, it doesn’t mean that they have increased the value of the property in the same amount. However, if they are not repaired it may result in a loose of value of the house, higher than the repairing cost and, maybe even more important, the loose of possible buyers, because they feel that the house needs too much work and repairing. What happens with the roof, the exterior, windows, heating, electric system, central air conditioning and water heating system? These type of improvements are more expensive that the repairing mentioned before and the assets may have a higher impact in the liquidity and market value. While a buyer may be not enthusiastic about how beautiful the oven looks, because is now, they are going to have negative thoughts about a house where the oven is original and is from 50 years ago. A new oven will be more effective than the original, except for the buyer’s money is more important in the monthly bills of gas, and even more important, it’s a topic that would not have to be replaced by the buyer in a near future. These items are referred to the effective age of a house. The chronological age of a house may be very different from its effective age. There is a life expectancy in the time a roof will last, how long will an oven last? Etc. A 50 year old house can have an effective age of 20-30 years when improvements like these have been made. When comparing houses, the buyers are interested in a near future, the essential repairing and improvements that must be made, especially those that are expensive like the following.Very often the buyers don’t notice the house they’re interested in because of the simple fact that they need a lot of upgrade in a near future, even if the price is appropriate taking in count the house condition. Why? Very often, the buyers don’t have the time or the bent to get busy in the upgrading or important repairing, but even more important, they may not have extra money to make the improvements after the sale closing, because they run out their savings after the first payment and the closing costs.Should an owner replace the original 50 year old oven when it’s ready to sell? Should he invest two thousand dollars or 4 thousand to replace the oven? An oven is an integral system in the house, and it’s something that the buyers are worried about. However, it’s just an aspect on the house. The question relates more if it’s going to cost more to sell the house with the oven, than of what it would cost to replace it. If the oven is the only topic that requires immediate attention, it may not avoid a sale. However, if there are other improvements to make, the oven will have a negative impact in the market value.You must take consideration of decisions like these for the general condition on the house. When investing in a new oven and expending 2000 dollars, what are the chances of getting a total refund of the investment? The reality is that it will help to sell the house, but not necessarily to a price where the real cost of the new oven will be recovered. What about a house where a part of the kitchen or the main bathroom are new improvements put buy the owner? Can the seller hope to regain the total of the most part of the cost? Improvements like these are very expensive, and without a doubt they will add market value. But, will the seller recover the total or the most part of the cost? This depends on other various factors, such as how recent are the improvements, how’s the general condition of the house, in what range of price is the house, where is the house located, and more important yet, what the buyers are hoping to see in a house like this one.About important improvements of a house, too frequent, the improvements are done to benefit and enjoyment of the owner, and not just to recover the total investment.Each one of the main improvements to the house is unique. There is no way this guarantees an exact amount of the added value on specific improvements.There are studies available that get close  the increase of the value for specific improvements, but each area of the real estate market is different! To get more information just look for “cost vs improvement value”.How much does the needs of the seller cost if an owner has his address since 30 years and has paid his mortgage, or if it’s an owner that has his house just a for a few years and has a loan on the original mortgage? The market value of your house it’s worth what it’s worth. The market value has nothing to do with the mortgage balance.In the same way, when an owner plans to move to another house, what he has to spend for his new home does not have any effect on the actual value of his house. His house it’s worth what it’s worth, independently if he is moving from a house he already owns, buying a less expensive house, or a more expensive one. The market value has nothing to do with the amount in which the owner has to buy another house.In any of the cases there’s a reality. With the purpose of selling a house, is necessary to have enough sale product to pay the existing mortgage and/or provide enough capital money to allow the purchase of the next house. To a lot of owners, it’s about a choice. Is it worth it to sell my actual house and move forward or not? To others, the options are not so simple.The house buyers make their buying Price decisions based on how much a home is worth for them, not in the amount that the seller is asking for or how much the seller needs. The buyers search and compare one house and another. They ask to see comparable sales, and base their agreement offer in what the real estate market says about the value of the property. In the majority of the cases, a buyer will not pay more for a house than what it cost him to find another one in similar conditions and services, commonly know as “replacement principle”.Font: AMPI National BulletinAuthor: David FialkSept 2009

Remax Sunset Eagle Mazatlan.David Fialk

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