Things that make a property appreciate in value
In a recent post we advised readers to be cautious about a popular idea: that your home is an investment. While there is some truth to this, we want home owners to understand that merely purchasing a home doesn’t necessarily mean you’re investing in your financial future. To just assume the value will increase is what investors refer to as speculating.
A home can’t be expected to go up in value. In general, yes, homes do appreciate over time. But there’s no guarantee that yours will. However, there are some things you can do to stack the odds in your favor.
Where does property value come from in the first place?
Value is subjective. An example to illustrate this is the explosion in the price of real estate in our market (Western Washington) over the last few years. With homes being so hard to buy these days, stories abound of people making an offer on a home, only to get outbid by $100K. To some, it’s worth it pay 100K over the already inflated market value.
Valuating homes
As any homeowner knows, the final sale price of a property is negotiated. Still, there are some standard reference points that can be made for valuating homes. A common one is CMA, which is short for comparative market analysis. This is simply looking at the sale price of similar homes.
Note that your home needs to be compared to other homes that are both similar and from the same area. Area and proximity are big factors in property value. The most sought after homes are in proximity to good schools, and amenities like shopping, entertainment, and the great outdoors. A huge factor --- and this plays a huge role in the craziness of the current Seattle market --- is the job market.
With major industrial/tech companies like Boeing, Adobe, Microsoft and Amazon, Seattle has become a desirable place to live. Factor in the mild climate, the amazing summers, and some of the country’s best scenery, and you see why real estate is expensive here. There’s more demand than the supply can meet...and with building being slow in 2021, the supply probably won’t catch up soon.
Property as an asset
Understanding real estate as an asset lends some insight, too. In truth, it’s not the home that is the real asset: it’s the land. The important thing to understand about land is that it’s a fixed commodity. In other words, there’s a finite supply.
As the population grows, demand increases for land. So land goes up in value, typically at a rates lightly higher than inflation. But note that this growth is an average of all homes. Some areas appreciate faster than others, and some areas depreciate. Demand is high in certain areas. So the finite supply in those areas will increase faster.
So let’s put the actual structure --- the home --- on a piece of land into perspective. The home itself is temporary. And since most homeowners are not real estate investors, they’re mostly concerned about having a home that suits their needs. One of the main reasons to own, rather than rent, is that you can customize your house.
Why does this matter? Because the upgrades you do to a home might matter less to somebody else than they do to you. As the current Seattle market shows us, sometimes the house itself is almost irrelevant. People are so desperate they’re paying 100K over the already-inflated market value for mediocre homes.
But, of course, the house does matter. In fact, upgrades are one of the things that can increase the value of your home. What you really need to understand is that not all upgrades do. This article here offers a nice breakdown of the typical ROI (return-on-investment) of specific types of home upgrades.
Our conclusion is that its worth understanding real estate from two different angles: that of the homeowner, and that of real estate investor. If you’re smart with your home ownership, you could meet a return on your home of 8.56 to 9.96per year.
Important steps to making money on your home
1. First of all, you need to protect your asset with proper maintenance. Cost of ownership is simply a reality when it comes to real estate.
2. Plan ahead--- as far ahead as you can. Ideally, you’d be planning your subsequent move while you shop for your next property. You always want to be in a position to sell at a good time. That could mean selling a bit earlier than you’d planned, or perhaps waiting a bit. But if you set yourself up to be flexible, you maximize your options.
3. Choose areas where the demand will increase. Nobody can predict the future. But pay attention to trends like a growing job market or the loss of a major job supplier. One way to game the market is to look at which way urbanization is going to go. When rural areas become suburbs, the price tends to group.
A good resource for understanding your market is somebody who studies that market for a living-namely, a real estate agent or an investor. Be cautious about the advice you receive, though. Always ask yourself if there is a motive for somebody to paint the picture as rosier than it is. Ultimately, its up to you to do the research, get second opinions about the market, and make the most informed decision you can.
However, if you’re just a homeowner and not an investor, it’s always important to make sure you don’t compromise your own needs by focusing too much on resale value. It’s perfectly okay to prioritize what will actually make you happy and comfortable in your new home, if that’s what is more important to you. There are other ways to invest your money.
4. Be smart with your upgrades. Choose upgrades that will serve your needs, and weigh that against how it will affect the resale value of your home.
5. Buy/sell at the right time. Buying low and selling high is a no-brainer. If only it were that easy. There’s no way to definitively predict when the market will go up/down, and how far. But having all your ducks in a row can open up opportunities for you.
6. Sell to the right party. Again, value is subjective. By being ready to seize opportunities, you can sell to somebody who is willing to pay a higher price. Having a real estate agent on your team will go along way to connecting with the right buyer. Not only does a competent agent know how to find buyers, but they can also advise you on when its time to take what’s in front of you or hold out for something better. They’re also experienced in negotiating.
Better Properties Eastside is here to help you find the right home for your needs in the Puget Sound area. You can contact us by filling out a contact form here.
Real estate agents looking for a firm that offers 90-100% commission can contact Lisa at (206) 399-3543 or Ryan at (310) 497-5112. See our offer here.