What really determines the value of your property?

Real estate has long been touted as a good investment on the basis of property having excellent value, but in order to capitalise in a dynamic marketplace, one has to understand the meaning of value in this context and the key factors which contribute to this value.

Steve Thomas, Secure Estate Specialist for Lew Geffen Sotheby's International Realty in Constantiaberg, says when broadly defined, real estate is the value of the land plus the improvements upon it, the resources beneath it - and the rights above it, without which the former has a basic, unenhanced intrinsic value with minimal benefit or yield.

"And in determining value, many people attribute a lot of weight to the rand per square metre ratio and, whilst it is certainly one factor, it's far more significant to those who view real estate from a purely investment perspective," says Thomas.

"A homeowner gains enhanced value over time while utilising the property as a place to live - the primary function, whilst the investor seeks only enhanced value or the highest financial return over time as the primary function."

So what factors must one then take into consideration when determining the true value of real estate?

Thomas says certain elements are fairly standard and easier to ascribe a value to, for instance the number of bedrooms and bathrooms, the size of the plot and the age and condition of the home, but one cannot disregard contributory value, which can significantly influence the equation.

This refers to the contribution made by particular features to the overall value of the whole property and this is often discussed in relation to renovations or improvements, which include a wide range of upgrades or additions, for instance adding a garage, deck or granny cottage.

He adds that one cannot ignore the external influences like proximity to a good school and amenities, and cautions to guard against overcapitalisation.

Original price paid plus improvement investments over time at a percentage growth does not always add up to the sale price achieved at the end of the day.

It's a very fine art to mix these qualities into a property in such a way that the majority of buyers in that sector of the market will see true, worthwhile value.

But essentially, Thomas says property which has been 'improved' can provide not only enhanced value but also 'yield' from, among other things, rental income.

And when one wonders why the price of two very similar houses can vary considerably, he says one can break it down even further by evaluating factors such as the quality of build and finishes, special features, location, views, lifestyle, security, surrounding neighbourhood and HOA capabilities/costs.

While it's impossible to look into the future and make 100% accurate predictions, Thomas says there are a number of steps one can take to determine 'good value' and minimise risk:

• Check (proposed) development plans in the area.
• Check actual selling prices in the area over the last 18 months to two years.
• Check the title deed (restrictions).
• Visit the area at different times of day (morning commute, lunchtimes and evening, plus late night).
• Talk to a reputable agent about current trends.
• Look at the proportion of houses under renovation versus the number of houses in poor state of repair.
• Aim for the worst house in the best area.
• Talk to locals.
   

"One of the important factors to understand is that different people and parties perceive value in different ways. Just the same as a bank sees value in terms of recoverability of its home loan advance in the event of a default, one person's idea of a view is another person's idea of a security risk," says Thomas.

"And, one also has to bear in mind that real estate is essentially a medium- to long-term investment, but if one has done your homework and researched the value of a property properly (for example minimised risk), then try not to be swayed by fluctuations."

Remember that fluctuations are inevitable as real estate always has and always will work in cycles of boom times and correction periods, he adds.