Long-term value is a combination of subjective and objective assessments. Value judgments are generally grounded in quantitative elements, notably price per square foot, comps, and overall market conditions. Recent sales prices of similar properties are important yardsticks for actual and perceived value. In the real estate industry, experts often suggest that it’s best to purchase the cheapest house in the most expensive neighbourhood, rather than the most expensive house in the cheapest neighbourhood.
In other words, it’s all about location, location, location. Metrics are important considerations because they provide tangible, measurable assessments. The qualitative aspects of long-term value assessment include the home’s condition, aesthetic appeal, crime, and safety metrics, and proximity to desirable community centers, schools, hospitals, shopping centers, and so forth. Detailed comparative analysis is typically conducted by real estate agents in tandem with homebuyers to get a clear picture of a property’s value.
Home Value Assessments Explained
As a homebuyer, there are several methods that can be used to evaluate a home’s value. Both tangible and intangible factors ought to be considered in the reckoning. The key methods for evaluating value in a property include the following:
- Online evaluation tools – These include a variety of automated models that estimate value on the basis of basic property details. Most of them are free to use, and they provide a low to moderate degree of accuracy. They are best used for ballpark estimates of a home’s value.
- Comparative market analysis – Often known by its abbreviation, CMA. These tools are also free to use, and they provide a moderate to high degree of accuracy. They are best suited to pre-listing and pricing decisions.
- Professional property appraisals – A professional appraisal costs money, but it provides a high degree of accuracy in terms of home value. An appraisal is ideal for lending and selling purposes.
There are usually four factors that determine a ballpark figure for a home value. These include the location of the property, the size and condition of the residence, market conditions, and comparable sales. Viewed in perspective, all of these factors can provide a homeowner with an accurate assessment of the home’s value.
The absence of these factors skews equity assessments, clouds transparency, and undermines fair value. Buyers and sellers need to know what a property is worth before transactions are concluded. There are loan risks for lenders, and buyers require peace of mind when investing in real estate. Otherwise, buyer’s remorse becomes a real phenomenon.
How Does Home Financing Play into the Value Proposition?
It’s clear that the physical attributes and market comps provide a baseline for the sticker price. But the true long-term value of any property is often determined by the financial instrument that is used to acquire that property. In other words, cash is king, or mortgages go the distance.
Sometimes, a specific demographic is privy to unique benefits when it comes to financing these types of value propositions. For example, a VA home purchase is expressly designed for veterans, service members, or eligible family members. While comparable to non-veteran loans, these VA loans often come with many attendant benefits that make homeownership a value proposition.
For example, with a VA loan, there’s no need to put a down payment on a property. That’s because there is partial government backing in the event of default. This makes it much easier for lenders to write these loans. Plus, rates are on par with, or sometimes better than, those offered by traditional lenders to non-veterans.
No down payment also means no PMI for the buyer. This would otherwise add significantly to the costs of the monthly repayment. The application and approval process for these loans is also much more streamlined than traditional lenders, with somewhat relaxed requirements vis-à-vis paperwork, credit scores, and work history. Savvy homebuyers totally get it. They understand that value is more than the purchase price; it’s the total cost of homeownership over the lifespan of the loan.
So, if you’re dealing with high interest rates like 6% – 8%, mortgage insurance premiums, and a big down payment, these can quickly erode the perceived value of the investment. Add in HOA, country club membership fees, and insurance costs, and it’s clear that value goes a lot deeper than the sticker price. A statistically good deal often becomes a financial burden when everything is considered in its entirety. Specialized loan products are critical components of the overall value assessment. Transparency, accuracy, and fairness are sacrosanct.
Circling back to the VA home purchase programs for a moment, it’s clear that there is a two-fold intrinsic value:
- Capital Preservation – with a zero down payment benefit, buyers can save their cash for exigencies.
- Monthly Cash Flow – No PMI also saves homebuyers lots of money every month. Over 30 years, this creates huge equity retention that isn’t available through traditional lending channels.
The Wrap Up of Value Investing
There is no doubt that real estate investments tend to perform solidly over the long term. Evaluation of these long-term value propositions requires a forward-focused perspective. It’s about weighing ownership of a physical asset with the financial liability it presents. The focus shifts to the structural integrity of the home and the viability of the home loan.
Transparency is always important. Every expense item on the ticket needs to be carefully scrutinized, summed and evaluated against what the home brings to the table. By doing all of these things, it’s possible to determine the future worth of a home. This in essence is what value investing is all about.
