If you’re in the market for a new home, you’ve probably considered hiring a realtor to help evaluate the worth of the property. Well, here’s some news for you; realtors are no different in evaluating property than the average person. Besides being aware of the current market prices of properties and home loan rates, there’s not much that they can offer you in terms of determining the cost of a property.
However, you can use your own technical analysis to quantitatively come up with a price. There are three ways of doing this:
The sales comparison approach is the most commonly used approach to evaluate property in Texas. The principle behind it is simple – the property is compared to other similar properties and a benchmark cost is evaluated. For example, if 1000 square feet houses are being purchased for $50,000 in Dallas, similar properties can be evaluated based on per square foot price of $50 per square feet.
The right way to do a sales comparison analysis is to take a longer period of time so as to account for any outliers and discrepancies. The approach is quite useful as it can evaluate properties of different sizes using a cost per square foot benchmark.
However, there are a few limitations to the technique. Different properties have different features that may raise or lower their value, which this method doesn’t take into account. Coming up with an exact dollar amount can be quite difficult; the tool serves as a good method for figuring out a price range instead.
The income approach is more technical than the sales comparison method. It’s used to evaluate the annual return on the initial investment for a property. So for example, you apply for a mortgage loan for a $100,000 property and are expected to pay $300 in premiums monthly; the total premium for the year would be $300*12/$100000= 3.6%. This is the rate you will be paying yearly as a percentage of the property’s value.
While the above example is a more simplified approach, in real life there are several variables that need to be taken into account. Things such as the interest rate risk i.e. the probability of interest rates going up and the inflation risk i.e. the probability of money devaluing overtime also affect the interest rate.
Understanding the CAPM model requires a fair understanding of financial concepts, so we’ll try to simplify it. In essence, the model takes the interest rate that can be generated with a risk free investment such as treasury loans, and adds an additional premium based on the risk associated with the investment at hand (mortgaged property in this case). The additional premium is calculated using a beta value, which is a measure of the relative risk with the market.
The final value given by the CAPM model is the return rate that should be matched when considering a home purchase. You can always contact Todd Frank Home Loans with your appraisal questoins. Feel free to contact us at (972) 246-8633 to get the required information!