Given the fundamental changes experienced by the real estate market in recent years, many prospective home buyers have misconceptions about home values.
Even in today’s challenging real estate market, many potential home buyers believe that real estate values always increase on an annual basis, and that if they buy today, they will see house values grow by 5 to 10% a year.
That would be fantastic appreciation, and would make nearly any home purchase a sure-fire investment, if it were true.
In reality, home values tend to only increase between 2 to 5% in a normal market. Given the volatility experienced by the sector this year, house prices have done more falling than rising. Earlier this year, FNB property strategist John Loos said that the property market would see a fall in house prices, particularly since further cuts in interest rates appeared unlikely, and expected an average decline of -1, 2% for 2011 as a whole.
So why would people have the misconception that a home is a guaranteed money-maker in today’s market? A key reason for this is the valuation, which can be an invaluable tool when utilised correctly, and a hugely problematic stumbling block when viewed through those tempting rose-coloured glasses
What do I mean? I mean, that even with all the doom and gloom surrounding the housing market in the media, there are still people out there who are convinced that all they need is a high enough valuation and a low enough asking price, and they are “guaranteed” to make money. If you are one of these would be real estate investors, you may be right, but you need to ensure that you understand exactly what you are dealing with before you plonk down your money and buy.
The house valuation myth is very straightforward, and here it is: “A valuation tells me what I can sell a piece of property for”.
Oh, if only! A valuation tells you what a piece of property could sell for based on past sales of properties in the area. As a result, it cannot predict the future, but only tells you what you can hope to be true on the basis that you find the right buyer and other home values are still “right” as well.
So how can you get an idea of what a property is really worth to you? Well, you need to decide what you want to do with it. For example, if you are speculating, one factor in your success is going to be speed. You don’t want to hold the property for months while you are waiting on that “right buyer”. Your right buyer has money in hand right now.
Once you have a valuation for a property, talk to a real estate agent and find out what they would list the property for if you had to sell immediately. Also, talk to local investors to find out what they are paying for investment and distressed properties in the area. This information will give you a far better idea about how much you can realistically expect to get from a property than any appraisal, and help you make a better decision about whether or not you are paying too much for a property.