You always hear of ‘buyers beware’ when buying properties or second-hand goods. In property transactions, sellers must also beware, particularly of the selling price. Don’t get into situations where you kick yourself for selling your property below market value.

Factors Determining Price
 
It is important to understand the factors that determine residential property prices.  That way, you will be in a better position to capitalise on opportunities available in the property market when they present themselves.

Knowing when to get into the market, before prices start to go up and get out before they come down, you stand to maximise your profits and minimize possible losses, if not eliminating them.

The forces that influence the prices of our houses are the same that influence the prices of cars, goods and groceries - demand and supply.  The price of an item is dependent on the demand for that item and how much of it is for sale.

Supply And Demand

The law of supply and demand is a key factor that helps determine the value of property. If there are many homes on the market but very few buyers, the value of the properties will decline. High demand, low supply, the price goes up.  Similarly, low demand, high supply, the price goes down. How do you know an area is in high demand - just check the number of homes in the area that are up for sale and how fast they are sold and taken off the market.

Property Condition

Property value is also determined by the features and characteristics of a home. A home that is well kept will be worth more than a home that is run down and needs repairs and renovation. Not many buyers want to take out more money to fix a run-down house as finding reliable renovators can sometimes been quite a challenge if you are not in the trade.

Location

Over and above the factors above, location is still the key. A home that is located within a good neighbourhood will naturally attract a higher value. In today’s market, the security of the neighbourhood is of prime importance.

Climate of the Real Estate Market

The state of the real estate market is not specific to any particular home, but can weigh in heavily on the value of the home. In ‘good times’, the prices of properties will increase or be inflated. Conversely, when there are many homes for sale, few buyers in the market, home prices will fall. The availability of mortgages and interest rates can also affect the demand for housing.

When mortgage rates are higher, and lenders are being more conservative about who they lend to, the number of people looking to buy or able to buy property will be reduced, resulting in lower home values.

The impact of market forces is another reason why buying property in a good location is so important. Homes in more desirable locations tend to resist losing value more than homes in less desirable areas.

Rents

If rents get too high, tenants start looking at the option of buying property instead of renting it. This increases demand for property. It doesn’t take a professor to work out that in many cases, you are better off buying than renting.

Prospects of Capital Growth

If investors feel that property prices are about to increase, they are more likely to get into the property market and capitalise on the opportunity to make money. This increases demand for property and consequently the price.

On the other hand, if investors fear that the property market is coming to a halt or even worse, property prices are about to fall, some will panic and sell their property.

Market Value

Market value is generally defined as the price a willing buyer would pay a willing seller for a property in its present condition with neither buyer nor seller under pressure to act. A market value sale is also known as an arm's length transaction.

A number of factors may affect a home’s market value, including:

Use Sales Comparisons

The most common way to determine the market value of a home is to use the sales comparison approach. This is the primary method used by property valuers to determine the market value of residential properties.

To determine an estimate of a property's market value, arm's length comparable sales are used. By examining recent sales of at least three properties in the neighbourhood that are comparable in size, style, improvements and condition, you can begin to get a good understanding of a residential property's market value. However, it is important to consider the circumstances of such sales - perhaps the seller was desperate to sell the home, or the buyer paid much more than the asking price because there were other interested parties. Market value and sales price are not always the same.

Comparable sales should include characteristics similar to the property, such as lot sizes, built-up area, age, and location of the home.

Where to find comparable sales

Finally, it is always good advice to do your own independent assessment than to just depend on word of mouth alone.

Chan Ai Cheng
General Manager, S. K. Brothers Realty (M) Sdn Bhd Registered Estate Agent with the Board of Valuers, Appraisers and Estate Agents Malaysia (LPPEH), Member of the Institution of Surveyors Malaysia (ISM), and the Malaysian Institute of Estate Agents (MIEA), Registered Financial Consultant with the International Association of Registered Financial Consultants (IARFC), For any feedback on this article, please email http://aicheng@skbrothers.com