How Much is that property worth?

There are pitfalls galore lying in wait for anyone thinking of either selling their home, or planning a new purchase. You need to have a good grasp of the essentials and keep emotions in check to come out with a winwin result. To make things easier, RE/MAX Corporate Egypt Head of Real Estate Valuation and Feasibility Studies Department Dr. Hady Fathy walks us through the process from A to Z.

What is a property appraisal?

Property appraisal is the process of assigning a value to a property for the different purposes. The first step in appraising is to determine a property’s fair market value.

The method to calculate the fair market value can be performed using one or more of the following three approaches:

The Sales Comparison Approach

Involves the analysis of recent sale prices of similar properties to determine the most probable price that a property would sell for on the open market between a willing buyer and seller. Typically, this method involves selecting properties with similar characteristics in the same market area that have been recently sold, once those properties are found they are compared to the property in question. This approach is the most familiar one as it is the accepted method for valuing any real estate. It is best suited to types of property that sell frequently (e.g., residential).

The Income Approach

This may be used when there is insufficient sales data available and the property is income producing. This valuation approach is a shorthand means for real estate investors to determine the value of a property based on its income in comparison to similar properties.
Essentially, if we know what the capitalization rates are in a given market for that type of property, we can divide the income generated by the property by the capitalization rate and come up with a sales value as a result. It is often used to appraise properties such as retail buildings, hotels, apartment buildings or rental office buildings.

The Cost Approach:

This approach is useful when the property being appraised is a type of property that is not frequently sold and is not an income producing property, or there is a limited amount of sales or rental information available, or when the property is a special use property.
The cost approach makes the assumption that a reasonable buyer would not pay more for an existing property than it would cost to buy a comparable land plot and construct a building that is also comparable in terms of desirability and usefulness.
It requires the appraiser to calculate the fair market value of the land using the sales comparison approach and then add the construction of the building. The last step requires the appraiser to subtract an amount that reflects the existing deterioration (depreciation) of the current buildings and structures.

The most common problems you find in buying a resale property and how to avoid them

1- Write your vision of your new home.

Your vision of your home is not that simple, but some statements describing the desired state of your life after you buy your new home, all elements of your life, including where, how and how much you live, work, play and rest, etc.

2- Buy what you need, not what you want.

Look at the current house that you are already living in, it will help you to understand what you have been missing and what you need in your next home. Make a list of those needs and then start to shop based on those needs.

3- Set a realistic budget before you decide to buy a house.

You should sit down and make a monthly budget of what you spend every month, come up with a number that you are comfortable spending on your installment or mortgage payment, aside from those other expenditures. An easy way to do this is to take a third of your gross income and have that figure be the number you spend on the house installment or mortgage payment.

4- Research the neighborhood.

It’s absolutely critical that you research the neighborhood before you buy, check out the area, amenities, the schools, the clubs, the hospitals etc., to be sure that your address corresponds with the correct district. You’re not just buying a house, you’re buying a piece of that real estate and the neighborhood around it.

5- Find a good real estate agent, and why you need one.

It’s about better access and more convenience. A real-estate agent’s fulltime job is to act as a liaison between buyers and sellers. This means that he or she will have easy access to all other properties listed by other agents and will know what needs to be done to put a deal together.
A real estate agent will do their best to select properties that most closely match your needs, and help you buy a property at the lowest possible price. Remember, real estate agents don't want to sell you something that you won't be happy with because unhappy customers are bad for their business.

6- Remember, you can always trade up a few times before you find the ultimate home.

7- When you buy a house, it›s not just a place to live in, it's also an investment, keep in mind that down the road, your home will most likely be the most expensive thing you will buy and your largest investment so you'll want to feel comfortable when you are buying it and also when you are thinking of selling it.

8- Don’t judge a book by its cover, the same goes for your new house, go inside and look around before making your final decision.

9- Know when to quit, when you act on emotion, rather than reason, you may end up paying too much money, this can happen when you fall in love with a particular house and start fantasizing about it. Another reason you may be driven to pay too much is that a bidding war triggers your competitive instincts and you must buy the house at all costs, which you will regret later.

10- Remember that real estate never sleeps, if you find what suits you and you’re trying to buy a ‘hot’ house, you have to move quickly, or you could possibly lose it.

Important points to take into consideration when selling your property

- Selling your own house is not easy as you are emotionally attached to it. If you do your own selling, keep emotions well in check. When you are going to sell your home, make sure the price is right. Valuing your house correctly according to the current market conditions in your area is the first important step. Some sellers believe that if they overprice their property, they have more room to negotiate or they can always reduce it later. If your home is listed too high, buyers may skip over it. Properties in good shape are rare, and they don’t stay on the market for long.

- Remove or replace your favorite items. If you want to take, for example, a built-in appliance or fixture with you, remove it now. If a buyer never sees it, he or she won’t want it. Once you tell a buyer he or she can’t have an item, it could blow your deal, so pack those items and replace them, if necessary.

- Don’t try to make the ‘hard sell’ while showing. If you are selling your house, you really shouldn’t be around at the open house, you might want to try to sell the house based on all the reasons you think the house is great, but that might not translate to the buyer. If you leave, you allow the buyers to give unbiased objective feedback to your real estate agent, which is only going to help you in the end.

- In any negotiation, exposing your hand by letting the other side know how badly you want something is always a bad idea. The buyer will always be cordial and friendly, whether it’s because they want to buy your house or because they’re simply nice people, but don’t view them as your friend. Don’t let them know how badly you want to sell the house because it will probably cost you money.

“Location, location, location”

Location is the key to valuable real estate. In terms of accessibility, you should look for a neighborhood that is situated near a city’s major transit routes and that has more than one point of entry. Commuting to and from work is a big part of many people’s day, so a house with easy access to main roads and public transportation will be more desirable than one that can only be accessed by one route.

A great neighborhood should also include important amenities such as grocery stores, shops, and restaurants, most people like to frequent places that are convenient. If you have to drive a great distance to get to anything, it’s likely to make your house less attractive. Schools are another important amenity, even if you don’t have kids, if you want to sell your home in the future, many buyers will be on the lookout for good schools. The quality of schools and universities and the distance from the house are both important factors to consider.

The appearance of the surrounding neighborhood is also important, large trees, quality landscaping, and nearby parks or community spaces tend to be desirable. You can also judge the popularity of the neighborhood based on how long homes in that area stay on the market; if turnover is quick, you’re not the only one who thinks this is a desirable place to live.

It is not just the present amenities that matter, but future ones as well. Plans for new schools, hospitals, public transportation, and other civic infrastructure can dramatically improve property values in the area. Commercial development can also improve property values.
When you’re buying a new home, try to find out whether any new public, commercial, or residential developments are planned and consider how these additions might affect the desirability of the surrounding areas.

Dr. Hady Fathy
Head of Real Estate Valuation and Feasibility Studies Department
RE/MAX Corporate Egypt