When it comes to evaluating the value of a property there are more ways than meet the eye; like beauty, the value of a property is often in the eye of the beholder. Savvy buyers and investors use several of the following methods to determine if the price is right:
Comps: Comparing a property to others is the most commonly method of establishing price and value. Age, size, location and amenities are compared to other properties in the area. Unfortunately, this method doesn’t work well for unique homes or those lacking nearby comparisons.
Income Potential: Another popular method is to determine the amount of income the property would generate if rented or used in another endeavor like a small business or hobby.
Return on Investment: Calculating the ROI is a good measure especially for those buying income producing property or “fixers” in need of extensive renovation or repair. The ratio between money invested into the property versus the anticipated return (often using leveraged funds) is particularly useful for those who purchase real estate as an investment. For example, if your cash outlay was $10,000 and you made $2,000 your ROI would be a whopping 20%.
Replacement Cost: Inflation, taxes, permits and other costs tend to rise over time making it more costly to build a home. For example, 25 years ago many homes could be built for less than $40 per square foot while today it is difficult to find a home for less than $100 per square foot.