How to Calculate a Property’s Purchase Price

calculating purchase price

There are a handful of ways to grasp the value of a property. The quickest and simplest way is to hire a property appraiser who will give you a rough estimate of the fair market value of the property.

Usually, appraisers have years of experience working with residential homes in their local real estate market. As such, their valuation of a property is usually on point. Sometimes different appraisers can provide slightly varying appraisals for the same property. Typically the differences in the property’s valuation won’t be very big and this is part of the human factor.

Some may wish to calculate a property’s price on their own for their own reasons. This could be done as an initial step before seriously considering a cash out refinance or selling a property.

Basic Property Evaluation

One of the most basic ways to calculate a property’s value is to look up other properties. Check out an online real estate website, such as Zillow or Redfin, and locate properties that are similar in size and scope. Properties that are similar, can give you some insight regarding pricing. While this is more of a “ballpark” estimate, it can be handy for some before they make the decision to call in an appraiser.

It is important to stay grounded and not overestimate your property. Another tip is to make sure that the property you are comparing to yours is in the same zip code as well as physically close by.

There are other considerations that also may add or detract value to a property. Lakeside, seaside, and parks in the close vicinity may add to a property’s value. Condos or apartments on higher floors tend to draw in higher prices than those on lower ones as well.

On the other hand, close proximity to an airport or main street may decrease a property’s value due to noise pollution.

Other than the purchase price, here are some other factors which you should consider.

Property Capitalization Rate

If the property is an investment property, then the capitalization rate or cap rate is an important metric. Essentially it is what the property owner is looking forward to receiving from renting the property known as the monthly returns. By taking the monthly returns and deducting the operating expenses you receive a rough monthly income rate known as the Net Operating Income or NOI. The operating expenses usually include taxes, homeowner’s association fees, repairs, mortgage payments, and property management fees.

One thing capitalization rates struggle with is assessing future housing prices increases or decreases. Property capitalization rates should be seen as a snapshot in time of sorts, and should be updated every year or so, to adjust it with inflation and rising rents. For that we have appraisers, desktop valuations and housing price index data.

Desktop Valuations

A desktop valuation is a type of property valuation performed by a certified property appraiser. Unlike a standard physical valuation, a desktop valuation is done via specialized software and doesn’t require a visit. The fact that a desktop valuation takes minutes with a computer and doesn’t need a physical inspection is the reason it earned its name.

The software checks tax records of an area, compares recent sales, and takes a few other factors into account. Afterward it generates a report of estimated valuation. Desktop valuations tend to be much more affordable than a standard appraisal. Typically it can cost up to $200, while an appraisal can run up to $500 or more on average.

Desktop valuations are only recommended if the property is in good or average condition. One should also keep in mind that not every lender will accept it, and some may demand a full appraisal. This is because desktop valuations are considered much less accurate than full home appraisals. Some desktop valuations may include projections regarding future pricing projections based on Housing Price Index or HPI.

Housing Price Index

The housing price index is a measurement of the movement of single family homes in the United States. It is published both monthly and quarterly by the Federal Housing Finance Agency (FHFA) with data provided by Fannie Mae and Freddie Mac. The housing price index or HPI keeps track of all single family prices across the United States and their increase or decrease.

The S&P, the founder of the S&P 500, has its own index, which is similar but different. The ratings company released their own alternative called the S&P CoreLogic Case-Shiller Home Price Indexes.

The difference between the two is that the first calculates property across the United States as a whole while the S&P CoreLogic Case-Shiller Home Price Indexes takes into account regional growth by area. Another key difference is that the HPI is updated monthly and quarterly while S&P CoreLogic Case-Shiller Home Price Index is constantly updated.

Using the S&P CoreLogic Case-Shiller Home Price Indexes, one can get an educated guess of future property pricing, as far as five years in the future.

Talk to a Realtor

Certified Realtors are experts of the local property market. Usually they come with years of experience of assisting clients buy, sell, and rent property. As such, they usually know the local real estate market like the back of their hand.

A qualified Realtor can give you an estimate on nearly anything property-related if asked nicely. They may be prone to human error at times, but Realtors are likely to be more accurate at times than even a desktop valuation. While this is unofficial, won’t be accepted by lenders and an appraiser may be more reliable, it is still an option.

Realtors can also come in handy if you’re planning on selling the property. They can also assist if you plan on using a cash out refinance to purchase another home.

Calculating Property Purchase Prices

There are many different ways to calculate a property’s purchase price. Owners considering a cash out refinance or selling the property should consider a full appraisal. Most lenders will not approve loans without a full appraisal done by a professional. If one simply wishes to satisfy their curious mind, then consider using the options listed above. Last but not least, always make an educated decision before taking a financial leap.

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