Big Fish, Small Pond

In terms of valuing real estate, most of the value is placed, correctly so,  on the sales contract. The sales contract reflects that perfect point which  indicates the lowest price that the seller was willing to accept and the most  that the buyer was willing to pay in an open, non-distressed transaction. Yet  over time there are a few variables that will affect the value of that same  property simply by their physical characteristics.

One of these variables is where the property valuation sits on the local real  estate food chain. This means smaller properties will have a positive impact on  their value compared to the biggest, most expensive properties in that same  neighborhood.

Real estate appraisals, more of an art form than a science, address property  variances and assign those variances a monetary value called an “adjustment.” A  typical adjustment might be an adjustment for a home that has a pool and one  that does not have a pool. Or a home has a three-car garage and one that has a  two or a one-car garage.

For example, a home in a certain area sells for $300,000 and the home next  door recently sold for $310,000. Both homes are the exact same size but the home  that sold for $310,000 recently had a brand new roof installed. For appraisal  purposes, this roof adjustment must be addressed in the appraisal to justify the  difference in price.

With regards to property size, the smaller homes in the neighborhood must be  evaluated with other homes in the same area. And since most of the homes are  bigger than the smaller one, the smaller home will be compared to the larger,  more expensive homes. This can often result prices per square foot being  slightly better in a smaller home compared to one slightly larger in the same  area.

At the same time, the largest house in the neighborhood will only have  smaller homes in which to be compared. The larger home will have its adjustments  made “downward,” lowering the overall price per square foot.

This is not to say that larger homes in a neighborhood are overpriced. Like  any good for sale, the value of a home is what a seller and a buyer agree upon.  But in terms of overall price appreciation and valuation, a smaller home will  get an automatic boost in value, while the larger home may not.

To learn more about investing in Real Estate investing, including what to  look for in homes, investing in the current economy, and other industry  information visit http://propertydirectusa.com. For investment opportunities  visit http://buypd.com

By Blair Poelman

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