While laying down on the couch on
this lazy Sunday evening, a thought stuck to us: Is there any defined way to
value our Realties? Of course there are few in the form of Govt. DLC rates
& CMP (current market prices) that gives some indication of the possible
value of our real estate properties, but still we miss out many important aspects
if we go by these rates. Let’s go back to the basics and first try to slice the
term ‘value in real estate’ to finer levels.
What is ‘Value in Real Estate’?
To state in layman terms, value in real estate is created if any
of the following dimensions gains weight.
Let’s have a look at these
aspects in finer details.
Utility
Any asset/object is worthless if
it doesn’t create utility for the owner. If real estate property, howsoever
costly it may be, is unable to create its worth and use for the owner, then its
utility decreases. We hope the following figure can help in explaining this
further:
In above case, the utility of
cookies decreased with the increase in number of cookies. Same is the case with
real estate utility. If the property can’t be utilized to its full value, its
utility decreases.
Supply
Just compare the price of a
commodity (like salt) which is abundantly available to a commodity (like
petroleum) which is scarce! Same holds true for Real Estate in the way that
properties in an area where there are several options is cheap as compared to
the one where no properties are available.
Demand
Similar to the above concept of
Supply. If a property is in high demand, it is valued more & vice-versa.
Transaction
Suppose you have bought the
bicycle - Litespeed Blade (£25,317)
Just imagine how difficult will
it be for you to resell it or make its transactions! Same goes with Real Estate;
you invest in some property like this and get stuck to it for your lifetime:
literally no value.
Psyche
The social pride and
psychological pleasure is something that no one can monetize. It will be
different for each and every individual. Suppose for example, someone will
definitely derive immeasurable value by just having the pride of owning the
above bicycle.
Let’s demonstrate the entire
above concepts using a common example. Suppose you have a family of 2-3 members
& have bought the home shown below: (Just an imagination; don’t get carried
away! ;-))
Just check its value on different
aspects:
Aspect
|
Reason
|
Value
|
Utility
|
Such a big house for just 3 members!!
Under-utilization of resources.
|
▼
|
Supply
|
Definitely, houses of this sort are not
available down the street. It is tough to find such houses. They are scarce.
|
▲
|
Demand
|
Demand for such properties depends on buyers,
which is generally very less. You will rarely find a buyer looking for such
properties.
|
▼
|
Transaction
|
Tough to transact, definitely!
|
▼
|
Psyche
|
Un-measurable; if you can take care of
the income tax folks!!
;-)
|
▲▲▲▲
|
Closing Thoughts: These are some of the basics that we thought are vital
for any Real Estate Valuation. There are few more technical methods which we
will try and cover in our forthcoming posts.
------ Thanks for reading RealT Horizon J
------
