How is a Home Valued?
There are four key value factors of a home. It is wise to understand the value features of the property. The four elements of real estate value that must be present are utility, scarcity, demand, and transferability.
The utility of the property refers to its usefulness. The more useful a property is, the greater its potential value. Utility can be general like a standard house or specialize like a purpose built structure. The advantage of a building with strong utility is greater value. Deficiencies in a home’s utility lessens it’s the value.
Scarcity common meaning is lack of quantity. The same thoughts in real estate is a supply and demand concept. Insufficient supply of home puts pressure to higher prices. An oversupply of houses drives the price down. But this concept does need to be taken in the context of the whole economy and other factors that change this basic supply demand equations.
Demand refers to the desire to own real estate, coupled with the financial ability to buy. If there is heavy demand the price should rise or be worth more. The heart of real estate value is the supply demand equation. But as we’ve seen in the last few years and in other boom and bust cycles, the equation needs to be tweaked to take in the full value situation.
Transferability refers to the ability to transfer ownership of the property. This is a complicated subject. But for the purpose of this blog adding transferability into the equation of real estate value will help in understanding the need for clear title. If you can’t transfer the title of the property into your name how much is that worth? If the whole building needs to be torn down before the ownership can change, how does that impact the value?
Mixing the four basic ingredients of Home Value together creates the real estate value. Other factors can and do have an impact on the value. But understanding the interplay of four elements of utility, scarcity, demand, and transferability will yield the bases of property value.
Coffee Real Estate works with the great team of title experts to make sure of the transferability of your new home. In California we have many unique laws that can make this an issue.
Coffee Real Estate broker prepares BPO (Broker Price Opinion) for lenders and other professional clients. Our understanding of the value factors or real estate are at a high level. We use this knowledge to help our home buying clients understand how to value the home they are interested in buying.
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