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Here's How Real Estate Prices Go Up And Why It Matters

Mar 4, 2008
For the outside observer real estate appreciation may seem like a mystery. Their parents or someone they knew bought a home and then later sold some years later for a profit with no real indication as to why it was worth more. In this article I will explore some of the factors behind appreciation and real estate appraisal to help make sense of this important real estate dynamic.

Value is determined by what someone is willing to pay for something. There are factors that make property more valuable as well as aspects that make a property's value decline. The scope of this article is to look at some influences that make a property appreciate over time.

When learning to determine what a home should be worth it's important to draw the distinction between theoretical value and real value. When an appraiser does an appraisal he is estimating the maximum price a buyer should be willing to pay for a property. This is theoretical in nature. Real value is determined by the amount someone has paid for a home.

Despite having concrete rules as to how to arrive at a value of a home the actual number is subjective to each appraiser. I've found that appraisers will often differ as to how much a home should be worth. One often seen practice when appraising for a purchase is to take the contract price of a home and say its worth a little more than the contract price. Most appraisers will do this. There's an ethical dilemma with this practice. While I do make a commission from the sale of a home and want for it to close, I also want my buyer to not be paying too much for a home.

I recently had a client who was suspicious about the amount of square footage of a home he wanted to buy. So, he measured the house and it measured 45 square feet less than two appraisers had measured. He had his measurements verified by an appraiser and was able to justify reducing the purchase price by $4500 as it was offered at $100 a square foot. The two previous appraisers had simply gone along with the numbers without verifying.

A good rule of thumb for determining how much a home should be worth is by looking at the homes that have sold with similar square footage, number of bedrooms, and of a close proximity to the home. Other factors that should be considered are: what kind of parking does it have, what's the exterior made of, etc. Also, how similar is the area surrounding those other homes. By taking the similar sales and then averaging them you should be pretty close to what a home's value is.

Cosmetics or how cute a home isn't a major factor on determining a home's value. There will be a range of prices of homes that have sold in an area. The better a home looks the higher it'll place within that range. It's an important piece but not a major one.

Some of the factors that drive real estate appreciation are: surrounding homes in good condition, being in a desirable area where it doesn't take long to sell a home, new jobs in the locality, a low number of rental properties in the immediate area and a low crime rate. Upgrading the condition of a property and/or adding more square footage will also add to the value of a home.

I recommend adding more square footage with caution. If your house becomes the largest in the neighborhood then your return on value might start diminishing. Before doing improvements to a home talk with a licensed appraiser to make certain what you do will actually add value and how much. You might end up paying more for the improvements than you realize in value of the home.

Real estate should still appreciate over time even in areas where these factors do not exist. In an area where it does not a home's value might increase 1 to 2% a year. In areas where these factors do exist homes will generally appreciate 5-7+% annually. There are national and state economics at work as well. As we have seen for the past year real estate prices may go through lulls and even small declines but over the long term it's a safe bet that house prices will appreciate.

Because of the potential for appreciation, the option of collecting rental income and having an investment you can give to your children as well as many other reasons real estate is a worth while long term investment.
About the Author
Brien Satzinger is a real estate agent with Keller Williams Realty. Real estate is arguably the single best investment available. Brien specializes in relocating families. Click here to find out how to take advantage of Memphis Real Estate for investment or home ownership.
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