You would think that value would be more clear cut than it is. You would hope that everyone could see value the same way you do, and that there is no real debate about it, because facts are facts, right? Well, the FACTS will tell you that many will people will view and determine value in relation to different criteria based on their individual perspectives, and that something might not be as valuable to one person as it is the next.
Starting to make a little more sense?
Let’s look at a few examples of how someone could determine value:
1) Judgmental Perspective
In Managine for Quality and Performance Excellence (James Evans, Williams Lindsay 2008), the Judgmental Perspective on Value is more of a common notion of superiority or excellence among consumers as a result of marketing efforts, and as such, can not be defined. It is “both absolute and universally recognizable, a mark of uncompromising standards and high achievement.” An example would be the value you perceive when you hear of Ritz-Carlton hotels, or Lexus automobiles.
2) Product Based Perspective
Evans and Lindsay suggest that this view on Value is a function of a specific, measurable variable such as ‘miles per gallon’, or ‘stiches per square inch’. This form of value is not directly related to price, because quite often enough products with similar quality have different prices (perhaps due to Judgmental perspective on Value?)
3) User Based Perspective
This perspective assumes that value is determined by what the end user, or consumer wants. A big supporter of free market principles – I like this definition. This definition would ask “Valuable to whom? and how much would they pay for it?”
Turning to Real Estate, let’s look at the 3 most popular means of determining a Home’s Value.
1) Cost Value
How much would it cost to build the home from the ground up? Did it cost you $100,000 or $500,000? Surely that must be the value of your home, right? “I put in a $5000 furnace, so I increased the value of my home by $5000!”. Maybe….
2) Income Approach
This is a great way to determine value on income producing properties. This approach dictates that the value of the property is determined by the income it could produce at it’s highest and best use. Quite often that is used to sell a property on it’s potential, rather than another form of value (i.e. a tiny bungalow on a regular lot in a suburb VS the one two blocks over on a main road in front of a WAL-MART. You could imagine that there would be more potential with the latter, and it’s list price would likely reflect that). For a type of property that is commonly traded, such as a piece of investment property, be it residential or commercial, the value is nearly always a funtion of how much income it produces (as well as other variables of course, but income is the driving factor).
3)Direct Comparison Approach
This is the one folks. Make no mistake about it, THIS is how you can best guess what your home will sell for. It is based around the principle that an informed purchaser would pay no more for a certain property than the cost of acquiring another existing and equivalent property (http://www.aicanada.ca/section.aspx?id=39). What this means is, “how much is the home worth to a buyer? And at which point would the just as well go and buy my neighbours home?”, because in the end – that is the person that is paying for it. When preparing a home for sale, it doesnt matter how much the City values your home for tax purposes, or a bank appraises your house for, or even what your neighbour or YOU think it is worth – and why? Because none of these people are buying the home.
What you need to focus on is the value of the property in the mind of the person that will BUY your property. How do you determine what a buyer will pay? I’ve found that the best way is to study the past behaviour of buyers in your immediate market, and find out how much they have been paying for a home like yours. Naturally, you will have to make adjustments based on certain features – but don’t be lured in to say “well I paid $5000 for my hot tub, so add $5000 to my house!”….. because you’re just reverting to the cost approach. The proper question to determine adjustment amounts would be “how much is that feature worth to an informed buyer? How much would they pay for that? and at what point is it not worth it to them anymore?”
I understand that this is all easier said than done, because the average Joe or Jane does not ave access to the resources required to find out what homes SOLD for (as opposed to what they were listed for), let alone how much each adjustment should be worth in the real estate market. This does take the proper resources, skill, time and experience to determine.
This is one of the reasons that a Realtor is so Valuable (to the end user) – because they can do that kind of work for you, and often offer it for free as a way to put themselves in front of you.
How do you value your home?
Have you ever heard of someone placing value on their home based on another perspective?
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