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Real Estate Buying

In determining a property’s (home) growth potential, one has to make a long-range forecast of it’s market value in 20 years, based on available data. Long-range forecasting entails an analysis of a property’s (home) anticipated value by carefully considering factors that influence it’s long-term worth. By analyzing the economic and environmental factors affecting a property (home), it is possible to project its future market value and hence, its attractiveness and an investment.

Successfully investing in real estate requires a long term outlook that isn’t object to the ups and downs of short lived adjustment periods. By evaluating what’s happened to a given market a realistic projection based on available data, it is possible to predict future market value. It is, easier to predict the market value of a piece of real estate 20 years from now , than compared to its value next year or the year after.

Real Estate Buying

The first step in putting together a forecast in to gather all the data available/required to a specific site’s growth potential. Numerous factors need, to be taken in mind, such as”

    1. Local population trends.
    2. Average family income level and its projected growth or decline.
    3. Local and regional economic trends.
    4. Comparable property values.
    5. Past real estate appreciation rates.
    6. City development plans.
    7. Applicable zoning ordinances.
    8. Local street-widening and public works projects.
    9. Utility improvement plans.
    10. School enrollment projections.
    11. Plans for new civic and/or commercial developments that will enhance the community such as regional shopping centers, parks, schools, and recreational centers.
    12. Plans for city or county annexations.
    13. Other relevant building, redevelopment and real estate-related information that city and county planners can provide.

A city in not going to put more schools, parks and utilities if it doesn’t have a growth pattern. And if a city is to going to expand, it must plan 5 or 10 years in advance. It can’t expand with a growth plan, and such plans are matter of public record.

Armed with this knowledge, you can then make an informed decision, one that is in your long-term interest, i.e. will give you a long-term benefit. Remember that the best real estate investment strategy in the one what relies the least on chance and emotion and recognizes that the patience above all else makes for profits what you today will be worth tomorrow.

If you are willing to buy something and then stick with it, forever, the chances of you loosing will be remote. But most people cant do that, they see a 10,000 Rs. Profit and grab it. Or , they think that the whole thing is collapsing, or is going in a loss, they try to make a run for it. The key is to find the right piece of property (home) and try not to get involved with other properties.


Fair Market Value

Value is a vague concept that comes into play after you have inspected a property (home) and are beginning to negotiate a deal. Fair market value is defined by Barron’s dictionary of Real Terms as the theoretical highest price a buyer, willing but not compelled to buy, would pay, and the lowest price a seller, willing but not compelled to sell, would accept. Another definition of the market value of a house is the sum of money in which the presence of that structure adds to, or subtracts from, the value of the land it occupies, with land being valued based on its highest and best use.

Real Estate Buying

There are many number of values attached to a property (home). If you can isolate and segment the various values associated with a property (home), you will have the added advantage of being realistic when it comes to possession.

Buyers and sellers tend to cross lines: the seller usually will be sentimental, while the buyer will be looking for a Fair Market Value or less. In some cases, the seller has some sentimental attachments to his land, hence the reason that the price is too high, when they put it onto the market. However, many people don’t know that they are assigning a sentimental value to their land. Value is a personal matter. There is no absolute measure of how much a house will sell for, because, each land is unique and every buyer and seller brings different needs and objectives to the table.

The greatest gift a person can have is the ability to correctly, estimate the value of things. Here, it doesn’t imply to cost, instead, the personal value of things. If you’re not able to estimate value, you’re going to be left out in the cold. You won’t be able to live in the real world if, for instance, you can’t correctly estimate the value of your time. An important point is that values are created and destroyed by the actions, attitudes and thinking of people. So if the majority of people think a piece of land is valuable, it is. And that’s all that matters. Value is something in the mind. If a lot of people start thinking an area is not good, then real estate prices Fall. A real estate investor should be aware of the various values associated with the subject land. The most important thing about an appraisal is its purpose. You have to know what the problem or need is, or the type of value to be determined in the appraisal, he or she could make an improper analysis the result could be disastrous.

When buying a house, location is very important factor to be, considered. You can’t change the land or the surrounding area, but can always replace or modify the building to counteract physical deterioration and functional obsolescence, such as poor plan or outdated amenities. As land ages, economic obsolescence the loss of value from all causes outside the property itself become far more significant than physical deterioration and functional obsolescence because it effects the value of real estate dramatically. Economic obsolescence, or depreciation, is caused by factors that you as individual property owner have little or no control over. These include the condition of economy, interest rates, increased taxes, water shortages, smog, traffic congestion, crime rates, plant closings, and so on. There is more money lost because of economic obsolescence than there is from physical deterioration and functional obsolescence put together.

This is to inform you, so that you may think from the eyes of an appraiser. Just as an appraiser needs to know the problem or need associated with a job, so should the investor think about a purpose for the subject property. What do you expect to do with your investment? If you buy real estate for the long term, maybe you can afford to pay a little more, especially if that property has some unique value.

Some of the factors that you must consider, before you make the final and purchase of the land, are:

  1. Physical Value:
    • Valuation of land, independent of improvements
    • Replacement cost of the improvements.
    • Depreciation of the improvement based on age and physical condition, also, functional and economic obsolescence.
  1. Earning Value (Income):
    • Capitalization of net income.
    • Goodwill value of an established location.
  1. Effects of supply and demand:
    • Number of similar land/plots recently sold.
    • Number of similar plots in the market.
    • Advantages of good decision and arrangements.
    • Harmony with surrounding improvements.
    • Any known demand for similar properties.
    • Any evident scarcity of similar properties.
  1. Values that exist in the mind of the buyer:
    • General appearance of land and improvements.
    • Advantages of good arrangement and design.
    • Harmony with surrounding improvements.
    • Peculiarities in design (advantages or detriments)
    • Sentiment in buyer.
    • Social advantages of neighborhood.
  1. Suitability of improvements to the Land and Location:
    • Whether improvements are too large and costly or too small and cheap for location and land.
    • Whether land might be used for something more profitable.
    • Apparent trend of neighborhood development and future possibilities.
    • Extent to which district is developed and possibly changed.


Estimating Fair Market Value

Appraisers use three basic methods of estimating fair market value: the cost approach, market approach, and income approach. The cost approach is based on the depreciated replacement cost of improvements, plus the market value of the site. The market approach uses the sales price of similar properties that have been recently sold to determine value. And the income approach bases value on the property’s anticipated future net income. The three difference properties approaches provide a framework for evaluating different properties.

The cost approach is practical if you have a building that has just been built, because you know the value of land and the cost of construction and can separate them. If that building is the highest and best use of land, then the cost approach can, with some degree of accuracy, determine the property’s fair market value.

Generally speaking, though the cost approach is the weakest of the three approaches. Excepting new developments, how can you value a piece of land independent of the improvements? The improvement, or actual building, has a direct bearing on the value of the land. Since there is now measure in the market for comparisons, the only thing you can do is determine the depreciated replacement cost of the improvement. sometimes the cost approach is the only method you can use if you are valuing a school, government building, church, or specialist industrial commercial property.

The market approach, generally employed by buyer’s and the realtors for single family residences, apartments complexes, commercial properties and general-purpose industrial properties, analyses the property in relation to comparable sales that occur in surrounding area. The only effective way of determining market value of single-family residences is by analyzing comparable sales.

Because of this, the market approach requires adjustments for the land and building’s size, location, age, setting, and a host of other factors, including the unique circumstances and terms of sales that is comparable. The seller might have increased the price to get better terms or might have been motivated to sell for less for personal reasons. You can never be sure.

The income approach derives an income stream from any type of property that yields a regular flow of money, such as an apartment building, hotel, office building, restaurant or business, shopping center, or leased industrial building. The question becomes, how much net income can you get from it? The net income is then capitalized into value using capitalization rate commensurate with market condition.

The income approach is generally, reliable when appraising large income-producing complexes, such as office building, shopping centers, and the like. The income approach is generally unreliable when appraising duplexes, triplexes, and small income-producing buildings.

The fundamental reason for using the three approaches is that they bracket value, leaving the appraiser to use his or her expertise and best judgment in correlating one final estimate of market value. In addition, a market demand analysis should be, made to estimate present and future demand for the subject land. As a buyer, you would want to pay fair market value or less. But when you start to consider what a given land will do over a longer period of time and what will be worth after 20 years, current values become irrelevant.

A person with foresight has to be sure not to overpay for a land, but at the same time, not let a good opportunity slip away, because the land is theoretically overpriced.

In the final analysis, you should pay the present worth of contemplated future benefits, in which case you should be prepared to pay more than market value. If you are right in you analysis, it doesn’t make any difference.

There’s no way to make an exact forecast. The only thing you can be assured of is that if you buy in an area with growth potential, there will continue to be increase in land values because growth in a capitalistic economy cannot exist without inflation. You can also be assured that there will be dips in the economy, but overall trend will be inevitably be up. No doubt about it. Think how empty the term millionaire is becoming! It takes several million rupees cash in the bank, to be on a par with simple millionaire of 20 years ago.

Thus, knowledge effects your decision. Lack of which, will lead you to loss.

Real Estate Buying

Factors Effecting Market Value.

  1. The Nation:

(the national economy and the actions of the federal government can have a profound effect on every piece of real estate in the nation.)

  • Population Growth:
    • Present Trend
    • Anticipated Trend.
  • Fiscal Policies:
    • Federal Spending
    • Attitude towards taxation.
  • Cost of Government:
    • Increasing
    • Decreasing
  • Inflationary or recessionary trend
    • Shortage or surplus of labor and materials.
    • The effect on housing
  • Federal participations in housing:
    • Subsidized housing plans
    • Insured mortgages
    • Redevelopment plans.
    • Money supply.

2. The Region:

(generally, a segment of the nation set apart from the other areas by geographical boundaries that typically comprise a cluster of states.

  • Population growth
    • Present trend
    • Anticipated trend
  • Economic considerations
    • Natural resources
    • Labor supply
    • Interest rates
    • Tourist attractions.
  • Legislative actions
    • Existing laws.
    • Proposed legislations
    • Attitude towards property owners
    • Environmental restrictions.
  • Climate conditions
    • Effect on health and welfare
    • Effect on the social and economic climate
  • Agricultural production
    • Growth and expansion
    • Spin-off activity
  • Government actions
    • Subsidized industries and installation
    • Aerospace and defense
    • Military bases
    • Taxation policies.

3. The metropolitan area:

(A large center of population including one or more central cities and the adjacent satellite communities.)

  • Population Trends
    • Increase
    • Decrease
    • Migration
  • Economic Activity
    • Active verses dormant industries
    • Labor market
    • Employment trend
    • Influx or flight of industry
    • Current labor management relations
    • History of previous job actions
    • Natural disasters
    • Possibility of future occurrence
  • Construction costs
    • Skilled labor supply
    • Adequacy of material
  • Civic government policies
    • Tax increase
    • Assessments
    • Utilities
    • Maintenance
  • Major improvement program:
    • Redevelopment projects
    • Major construction progress
    • Highway and freeway development

  4. The community

(the part of the metropolitan area composed of a number of neighborhoods that have a tendency to ward common interests and problems.)

  • Geographical pattern
    • Natural terrain
    • Level areas
    • Mountainous regions
    • Natural barriers, hills, valleys, rivers
    • Natural beauty
    • Hazards
  • Satellite communities
    • Suburban areas
    • Residential districts
    • Regional shopping centers
    • Industrial complexes
  • Civic government policies
    • Tax increases
    • Assessments
    • Utilities
    • Maintenance
    • Rent control

      5. The neighborhood:

(a residential area with distinguishing characteristics comprised of people with similar interests. Numerous factors and trends affect the quality of the neighborhood.)

  • Physical characteristics
    • Overall trend of the area
    • Quality, convenience, and availability of facilities
    • Public transport
    • Shopping centers
    • Churches
    • Cultural and recreational
  • Land and improvement characteristics
    • Street patterns
    • Availability of utilities
    • Similar land uses, size and shapes of plots
    • Percentage of area developments
    • Harmony of development
    • Similar types and quality of improvements
    • Monotonous housing tracts
    • Cohesiveness of original designs (size, quality, price and range)
  • Manmade attributaries
    • Freeways
    • Boulevards
    • Railroad tracks
    • Industrial and commercial complexes
    • Zoning designations
  • Economic characteristics
    • Family income traits
    • Occupations
    • Wage levels
    • Employment stability
    • Percentage of families on public assistance
  • Degree of home ownership
    • Number of rentals
    • Range of rental income
    • Number of vacancies
  • Social characteristic
    • Density and composition of population
    • Average family size and ages
    • Prestige/social status
    • Attitude of the inhabitants
    • Civic pride
    • Participation in community activities
    • Pride of ownership
    • Existence and use of educational and cultural intuitions
    • School enrollments
    • Absence of present vice.
  • Real estate sales activity
    • Number and price of home for sale
    • availability of office spaces
  • Sales condition
    • Availability of financing
    • Size of down payments made on purchases
    • Willingness of lenders to participate in area
    • Number of foreclosures
  • Government characteristics
    • Taxation policies
    • Property taxes
    • Other taxes: city license fee
    • Delinquencies
    • Municipal fees and assessments
    • Zoning ordinances
    • Building codes
    • Health and fire regulations.
Real Estate Buying

Making a Good Offer:

Making an offer to purchase a property and writing a satisfactory agreement are paramount in the execution of a successful real estate transaction. As a general rule, an offer should contain or consider the following.

  1. How title should be taken by the buyer (joint tenants, community property, or tenancy in common)
  2. The specific date and time when the offer the buyer will expire.
  3. The street address and precise lot dimensions of the subject property.
  4. That the seller warrants the building are located legally within the property lines.
  5. That the seller warrants there are no encroachments on adjacent property.
  6. That the seller warrants no other person has any right, title, or interest in the property other than what appears on the preliminary title report.
  7. That the seller warrants there are no unrecorded liens against the property.
  8. That the seller warrants there are no violations of building and safety laws, either pending or contemplated.
  9. That the seller agrees to allow the buyer to obtain a permit of occupancy on the property. If there is any expense or corrective violations in connection with the permit, said expense shall be the total responsibility of the seller.
  10. That the seller is not aware of any contemplated changes in zoning effecting the property.
  11. That if the sale is contingent on a zoning change, the seller will co-operate by signing all necessary documents.
  12. That the buyer shall have the privilege of approving the preliminary title report before the closing of the escrow or transaction.
  13. That a termite report shall be submitted in to the escrow or trust account and be dated after this agreement. And that the seller shall, at his expense, comply with all the requirements of the termite report unless otherwise agreed to.
  14. If the buyer’s funds come from a 1031 tax- deferred exchange transaction, the seller agrees to co-operate in furthering the exchange by signing all necessary documents, provided that the seller is not affected financially.
  15. That the seller warrants the property is not located in any hazardous areas, such as in flood zone, or on an earth quack fault, an area of earth movements, sinkhole areas, tornado or hurricane regions.
  16. That the buyer has authority to approve all existing leases and vary all rents. And that the seller warrants no building area were rented by giving any concessions of any kind. Seller warrants that all the rents area accurate and correct as stated and that there were no free or reduced rents given.
  17. if the buyer is assuming a promissory note or deed of trust (or mortgage) of record, buyer shall be given an exact copy of said documents for his inspection and approval before the closer of the transaction. Seller warrants all the terms of encumbrance are exactly stated as stated in the offer, and that there is no enforceable acceleration clause or due date no note or note to be assumed.
  18. That the buyer and/or his broker or representative shall have the authority to inspect the exterior and interior of the structures and to approve the conditions of the structure as well as the roofing, heating, electrical and the like, before the sale is consummated.
  19. If buyer disapproves of any item or items, the escrow company or real estate attorney is instructed to return all funds to the buyer without further instructions or signature from the seller.
  20. Escrow or transaction officer is instructed to have all rent deposits prorated on the cash down payment and not on any trust deed or mortgage.
  21. If there are any monetary adjustment s to be made, they shall be to seller’s purchase money deed of trust.
  22. Buyer may assume present insurance or take out a new policy at his option.
  23. Seller shall pay all escrow charges in connection with sale. All other charges shall be paid by the buyer and seller in customary manner.
  24. Buyer shall get possession of and be responsible for the property after closure of the transaction.
  25. Seller warrants that all leases are in effect and have been changed or modified. Seller further warrants that there are no defaults in leases either by the leaser or the lessee.
  26. Seller warrants that there is no filled ground, toxic waste, asbestos, or other hazardous material on the premises.
  27. Seller warrants that there is no loans or notes against the personal property involved.
  28. Seller agrees to furnish buyer with a chattel mortgage report (pledge of personal property) at his expense. Seller agrees to list all personal property in detail that is to be included in the sale and provide a bill of sale to buyer. Buyer has authority to inspect all personal property before closure of the transaction using said list and to verify the accuracy of the said list.
  29. If title cannot be delivered to buyer no damage to buyer shall be incurred. Buyer shall be reimbursed for all funds deposited in escrow without further instructions or signature from seller.
  30. Seller is to allow buyer two working days after close of the transaction to change over all utilities
  31. Seller is to deposit all key to property which are in seller’s possession before close of the transaction.
  32. Seller is to provide buyer with a list of all the persons having keys to the property.