What is a house worth?
Posted on Mon, Dec 13, 2010
In 1884 the magazine, Scientific American, considered the technical aspects of sound in the riddle: "If a tree were to fall on an uninhabited island, would there be a sound?". They explained: "Sound is vibration, transmitted to our senses through the mechanism of the ear, and recognised as sound only at our nerve centres. The falling of a tree or any other disturbance produces vibrations of the air. If there be no ears to hear it, there will be no sound." .png)
So what is the value of a house whose owner has no intention to sell it? This question is less philosophical than you think.
Unlike a tree, technically, a house has many values. Replacement value looks at bricks and mortar. Sentimental value, on the other hand (little Johnny took his first steps here, it’s where Granddad died and the family got together for raucous holidays) is ethereal. In between these extremes we have the somewhat rarefied realm of reality, the realm of market value, municipal values, bank values etc.
A diamond ring purchased for R4, 000 and valued at R5, 000 for insurance purposes may never achieve that value at an auction and even less at a pawn shop. Fundamentally, like the silent fall of a tree on an uninhabited island, a home has no defined market value until it is actually sold. The heterogeneity of property as a multi-variable asset class challenges any determination of the value that a prospective buyer is prepared to pay for the house if it is for sale.
Many South African homeowners consider themselves as authorities on the market value of their properties. However, the belief that knowing what you originally paid for it, reading newspaper adverts of homes for sale, living in an area for a reasonable length of time somehow qualifies you in this respect is not only short-sighted but from a financial perspective, extremely risky.
In international best practice, Market Value is defined as the estimated monetary value, for which a property, after adequate marketing, is exchanged between a willing buyer and a willing seller. Additional conditions to be met are that the transaction is, in legal terms, arm’s length and one wherein the parties had each acted knowledgeably, prudently and without compulsion (International Valuation Standard, 2003).
In the good old days it was a simple case of getting an estate agent to walk through the house and do a valuation. Now though, in the age of modernity where estate agents are held responsible for bursting the property bubble through overvaluations in the hope of higher commission, more buyers and sellers are doing their own analysis.
The steep growth in property prices between 2004 and 2007, due in part to lenient lending practices, high demand and short supply of good properties, allowed for sale prices higher than their “value”, or more specifically higher than the prices of statistical indices based on historical data.
For the astute buyer or seller the best place to start your market price analysis is online. There are easy-to-use property data portals such as www.evaluatenow.co.za powered by the South African Property Transfer Guide (SAPTG). For a nominal cost one can obtain comprehensive information such as the statistically predicted market value of a property you wish to buy or sell. In addition, recent sales of other nearby properties, closest amenities, the highest, lowest and average selling prices are all provided on these reports.
Then actually drive to the recently sold homes and compare them with yours objectively to ascertain comparative value. Speak with qualified estate agents who are members of the Institute of Estate Agents (www.ieasa.co.za) to obtain an idea of the supply and demand cycle in the area. Irrespective of the price band within which your home is categorised, it is demand (or lack thereof) that will ultimately decide whether it will achieve its true market value. Undesirable features of the subject property or the suburb, as well as already high stock levels will drive prices down. The converse is also true.
Professional valuations, though more costly, are objective and based on comprehensive risk analysis. Contact the South African Institute of Valuers for qualified valuers in your area (www.saiv.org.za).
Doing this homework is not difficult and more importantly will ensure that you achieve or pay a fair market price for the target property. Then celebrate with champagne and plenty of friends to ensure that the vibrations from your shout for joy will make a sound that will be heard!
Dieter Deppisch
Knowledge Factory