The Value Of Our Home
Introduction
The price of a property is closely connected to its value. Here I discuss and break down how we determine the value of our home, and what makes it more or less valuable than a comparable property.
The contributors of value
Understanding the value of one’s home in turn helps to understand how it compares to its comparable properties.
And if we can understand how our home compares to the comparables, then we will have a good idea of where/how to appropriately position/price it on the market to be more saleable than the competition!
What makes one property better and/or more valuable than another property usually comes down to the three most important contributors of the value: location, size, and presentation.
Over 90% of a property’s value is found in its location and size.
THE VALUE PYRAMID
The location of our home
Of the three, the biggest contributor is of course, location. After all, as the saying goes - it’s all about location, location, location!
And so generally speaking, if our home is in a more desirable location than a comparable property, then it will be more valuable than that property. Conversely, if our home is in a less desirable location than a comparable property, then it will be less valuable than that property.
A property referred to as being in a more desirable location usually means that compared to its comparables, it is:
Located in or closer to a quiet, peaceful, well-maintained and safe area, and/or a strong community; or a prime or in demand area.
Closer to local amenities, schools, transportation links, and/or a city centre or hub etc.
Desirability of location based on price per square foot
A simple way of knowing how desirable a particular location is compared to another location, is to find out the average price per square foot (£/sqft) of each location. Generally speaking, if the average price per square foot of our location is higher than that of a comparable location, then our location is more desirable than the latter. Conversely, if the average price per square foot of our location is lower than that of a comparable location, then our location is less desirable than the latter.
To better understand this, let’s assume that our home is a three bedroom property with the postcode NW3 7RS in Hampstead, London.
Based on this example, I have conducted a local search on the area around NW3 7RS, shown in the images below. The radius of the search area includes:
Briardale Gardens
Ferncroft Avenue
Hermitage Lane
Hollycroft Avenue
Kidderpore Avenue
Pattison Road
Platt's Lane
Redington Road
Rosecroft Avenue
Templewood Avenue
West Heath Road
(Please note that I have chosen this search radius for the purposes of providing a good and sufficient sample size for this example. The search radius can certainly be narrowed down but we will see a smaller and insufficient sample size as a result)
AVERAGE ASKING PRICE PER SQUARE FOOT
AVERAGE SOLD PRICE PER SQUARE FOOT
From these images, we can see that the average asking and sold price per square foot of our chosen area over the last 18 months are £1,080/sqft and £933/sqft respectively. And so generally speaking; if the average asking and sold price per square foot of a comparable location is higher than £1,080/sqft and £933/sqft respectively, then it is more desirable than our location. Conversely, if the average asking and sold price per square foot of a comparable location is lower than £1,080/sqft and £933/sqft respectively, then it is less desirable than our location.
Price per square foot is an important metric for valuing a property and determining the asking price. Click here to read more on why price per square foot matters.
The size of our home
Generally speaking, if our home is bigger than a comparable property, then it will be more valuable than that property. Conversely, if our home is smaller than a comparable property, then it will be less valuable than that property. The size of a property can be determined by its total square footage.
The number of bedrooms plays a factor in the size of a property and its contribution to the value. Generally speaking, the more bedrooms a property has, the bigger it is and the more valuable it is. For example, a four bedroom property is generally bigger and more valuable than a three bedroom property, but is also generally smaller and less valuable than a five bedroom property.
Price per square foot and the number of bedrooms are usually the key metrics used to determine a property’s value and asking price relative to its size.
To better understand this, let’s assume once again that our home is a three bedroom property with the postcode NW3 7RS in Hampstead, London.
Based on this example, I have conducted a similar local search on the area around NW3 7RS, shown in the images below.
(Please note once again that I have chosen the most suitable search radius for the purposes of providing a good and sufficient sample size for this example)
Value of size based on price per square foot
Based on the search radius and on the metric of price per square foot, we can see from the images below that the average asking and sold price per square foot of our chosen area over the last 18 months are £993/sqft and £926/sqft respectively.
AVERAGE ASKING PRICE PER SQUARE FOOT
AVERAGE SOLD PRICE PER SQUARE FOOT
If we take the average sold price per square foot as an example and assume that the total square footage of our home is 2,500 sqft, and the total square footage of a comparable property around the same area is 2,000 sqft, then the approximate value of each property are as follows:
Our home = £2,315,000 (2,500 sqft x £926/sqft)
Comparable property = £1,852,000 (2,000 sqft x £926/sqft)
Purely from a size perspective (not factoring presentation), we can clearly see that our home is more valuable than the comparable property due to it being the larger property.
The average prices per square foot (i.e. £993/sqft and £926/sqft) are essentially the benchmark of our chosen area and for our home. The value and asking price of our home should therefore be close to the benchmark.
As mentioned, price per square foot is an important metric for valuing a property and determining the asking price. Click here to read more on why price per square foot matters.
Value of size based on the number of bedrooms
Generally speaking, purely from the number of bedrooms perspective; the more bedrooms a property has, the more valuable it is, especially if it impacts the size of the property. Based on the same search radius but this time on the metric of price in accordance to the number of bedrooms, we can see from the images below that in our chosen area over the last 18 months, the average asking and sold prices of:
A two bedroom property is £833,000 and £1,140,000 respectively.
A three bedroom property is £1,360,000 and £1,340,000 respectively.
A four bedroom property is £1,960,000 and £2,040,000 respectively.
AVERAGE ASKING PRICE IN ACCORDANCE TO THE NUMBER OF BEDROOMS
AVERAGE SOLD PRICE IN ACCORDANCE TO THE NUMBER OF BEDROOMS
From this data, we can generally assume that our three bedroom home is more valuable than a two bedroom property but less valuable than a four bedroom property around the same area.
These average prices are also the benchmark of our chosen area; and specifically, £1,360,000 and £1,340,000 are benchmarks for our home as a three bedroom property. The value and asking price of our home should therefore be close to the benchmark.
Purely from a size perspective, the value and asking price of our home should be close to the benchmarks discussed (i.e. both price per square foot and value/price based on the number of bedrooms) without significant deviation. In other words, it would be difficult to justify our home to be significantly higher in value, not to mention difficult to justify a significantly higher asking price, above the benchmarks, purely from a size perspective.
Any justification would be down to the presentation of our home and how it compares to the presentation of the comparables.
The presentation of our home
For clarification, I refer to ‘presentation’ to include the structure, layout, design, aesthetics, condition, and facilities of the property. The presentation can contribute to the value, but the extent of the contribution is less clear-cut. For this reason, I have broken presentation down into four types, starting at the top from the most likely to contribute to the value, down to the least likely:
Structural or major presentation
Non-structural or non-major presentation with extra benefits or uses
Non-structural or non-major presentation that are in demand
Non-structural or non-major presentation with no extra benefits or uses, and no evidence of demand
Also for clarification, ‘non-structural or non-major’ refers to the type of presentation that is not a core or structural aspect of a property - this definition is based on the wording set out in the UK government’s website.
Structural or major presentation
Any presentation that is a core or structural aspect of a property will most likely contribute to the value.
For example, the number of bedrooms or bathrooms would almost certainly have a major contribution to the value as they are a core or structural aspect of a property.
So a five bedroom property would almost certainly be more valuable than a four bedroom property.
I discuss the meaning of ’structural or major’ in more detail elsewhere in this guide - click here to jump to that section.
Non-structural or non-major presentation with extra benefits or uses
This type of presentation is not necessarily a core or structural aspect of a property, but it offers extra benefits or uses that are not offered elsewhere.
For example, if a kitchen offers extra benefits or uses that are not offered elsewhere (in other words, not offered by comparable properties), then it may have some contribution to the value, especially if there is evidence of demand for those benefits or uses. So a property offering the style and function of a bespoke designer kitchen is likely to be more valuable than a comparable property offering a regular style kitchen.
Non-structural or non-major presentation that are in demand
This type of presentation is not necessarily a core or structural aspect of a property, nor does it offer any extra benefits or uses - but there is nevertheless a demand for the design, style, quality or aesthetic etc, of the presentation that isn’t offered elsewhere.
For example, if a kitchen offers no extra benefits or uses compared to an average kitchen, yet offers a pleasing design, style, quality or aesthetic etc, that there is evidence of demand for, then it may have some contribution to the value, especially if it's not offered elsewhere.
This may be the case if there is a clear demand (i.e. market demand) for a kitchen with a certain type of modern design (including fixtures, fittings or finish), layout, décor or workmanship etc (though more pleasing, offers no extra benefits or uses compared to an average kitchen). So a property offering a kitchen with such a demand is possibly more valuable than a comparable property offering an average style kitchen.
Non-structural or non-major presentation with no extra benefits or uses, and no evidence of demand
As an example, if a kitchen offers no extra benefits or uses compared to an average kitchen, and there’s no evidence of demand for the design, style, quality or aesthetic etc, of the presentation of the kitchen, then it is not likely to contribute to the value.
Without clear and attainable evidence to show what or how much the buyers get from the presentation, or how it translates into any discernible benefit or appeal to them, or any (market) demand for the presentation, it would be difficult to determine or quantify its contribution to the value.
So if a kitchen boasts a red décor, that is not likely to contribute to the value, unless there is clear and attainable evidence to show that the market values a red décor kitchen (or a very similar décor). In other words, the market (i.e. buyers in general) may feel indifferent towards a red décor kitchen - they may see no benefit or appeal to such décor or presentation, and therefore see no reason for it to contribute to the value; or to put it another way, it may have no influence on how valuable the buyers perceive the property to be compared to a comparable property without the same décor or presentation, nor have influence on how much more they’re prepared to pay for it (unless there is clear and attainable evidence to show otherwise). It may well be the case that the seller has a fondness for a red décor, but that fondness isn’t necessarily shared by the market in general. Therefore, that particular property may not be any more valuable than a comparable property offering an average style kitchen without the same décor (again, unless there is clear and attainable evidence to show otherwise).
Any contribution it may have will be to sway the individual buyer’s decision due to their own personal taste or preference, rather than contribute to the value itself.
The kitchen in this case may appeal to a particular buyer whose personal taste or preference matches the design, style, quality or aesthetic etc, of its presentation.
So even if a red décor kitchen may not contribute to the value itself, it may be the case that red is the buyer’s favourite colour. For that particular buyer, that particular colour/décor/presentation may very well be the icing on the cake that tips their decision in the favour of that particular property over comparable properties where a red or similar décor kitchen isn’t offered anywhere else.
In other words, this type of presentation may not necessarily make one property ‘more valuable’ than another property per se, but it may be enough to influence a particular individual buyer’s decision (with matching personal taste or preference) in one’s favour over the competition!
To be clear, although that particular buyer may favour a red décor kitchen due to their own personal taste or preference, such taste or preference is almost ‘unique’ to that buyer and not shared widely enough by the market (i.e. other buyers in general) to reasonably contribute to the value (unless there is clear and attainable evidence to show otherwise). In other words, the preference for a red décor kitchen may just be ‘personal demand’, but is not a ‘market demand’.
Ultimately, the value is what the buyer gets out of a property, not what the seller put in it.
Is it a good idea to price our home higher for particular buyers whose ‘personal demand’, taste or preference would match our home’s presentation?
I would strongly recommend against this for the main reason that I’ve discussed, in that personal taste or preference is not shared widely enough by the market to reasonably contribute to the value (unless there is clear and attainable evidence to show otherwise).
I would also add the following reasons:
This is simply an arbitrary reason to justify overly ambitious pricing or overpricing, in that we’d be pricing our home above the market value - the result of which would cause it to be less saleable, not to mention likely landing it in a higher price bracket, becoming visible to only the wrong type of buyers, and missing out on our most likely and promising buyers!
Without clear and attainable evidence to show a (market) demand for this type of presentation (in this case, a red décor kitchen), it would be difficult to determine or quantify its value, benefit or appeal; meaning that it would be difficult to arrive at an appropriate price without the risk of overpricing!
Although a particular buyer may favour this type of presentation (again in this case, a red décor kitchen) over another presentation from a comparable property, it may merely be the icing on the cake for that buyer that tips their decision in our favour. Which means that it may only hold a slight advantage in favour for our home but is not necessarily a dealbreaker nor have a significant influence on how much more the buyer is prepared to pay for the property.
Our home may not be visible to this type of buyer at all if it lands in a higher price bracket and/or falls outside of their search/price criteria.
This type of buyer we want would form only a very small portion of our likely buyer pool, as there will be fewer of them, which means that there may not be enough of them to create the level of interest, competition or demand we’d need to achieve the best price.
And because there will be fewer of them, we are effectively forcing ourselves to play the longer waiting game for them to appear, allowing our home to stagnate and become increasingly stale on the market in the meantime while we are waiting - consequently diminishing the time value of our home!
Even for this type of buyer we want, they may only truly be able to appreciate the presentation once they are through the door and seeing it in person (especially if our property listing’s photos or video cannot sufficiently convey its appeal). If they are put off, deterred or discouraged by the asking price, then they are unlikely to come through the door at all!
I would suggest that rather than pricing our home specifically for these fewer buyers, it would be far better to be pricing it in such a way to attract as many buyers from our likely buyer pool (in which these fewer buyers would be included anyway).
Seller sentiment and bias
Even if the presentation has no contribution to the value, it may nevertheless be tempting for some sellers to still want it to be reflected in the asking price regardless.
Their thought process may be that if they believe the presentation of their home to be simply ‘magnificent’ and ‘attractive’ and/or ‘better’ than the presentation of comparable properties, then there are likely others who are bound to share the same opinion (regardless of evidence or lack thereof).
This type of thought process brings out seller sentiment and bias into play, which can not only greatly hinder one’s chances of being able to sell for the best price, but also one’s chances of being able to sell at all!
I discuss seller sentiment and bias in more detail elsewhere in this guide - click here to jump to that section.
State, quality and condition
Earlier I discussed that if the presentation is non-structural or non-major, offers no extra benefits or uses, nor is there evidence of demand for the presentation, then it is not likely to contribute to the value.
However, one may be wondering - even if this may be the case, what if the state, quality and condition of one property is significantly better than another property? For example, a furbished, modernised property, or well-maintained property compared to an unrefurbished, unmodernised, or poorly maintained property.
This is of course a valid question that is worth considering.
As an example, let’s assume that we have two very similar properties in the same area: Property A and Property B.
Property A is furbished, decorated, modernised, or well-maintained.
Property B is unrefurbished, unmodernised, or poorly maintained.
The presentation of Property A will almost certainly contribute to its value relative to Property B, whereas the presentation of Property B (or lack thereof) will have little or no contribution to its value.
Property A is obviously more valuable than Property B, as these two properties are clearly not on the same level as each other in terms of state, quality and condition. The buyer will clearly get a property in a more liveable condition with Property A than with Property B.
If a property is unrefurbished, unmodernised, or poorly maintained, then it is not offering the buyer a property in a reasonably liveable condition, therefore its presentation (or indeed lack thereof) would have little or no contribution to the value, and certainly not on par with the value of its better-kept comparables. In fact, the value and price should take into account the additional cost required for the buyer to bring its presentation/condition back up to a liveable standard.
So if Property A is a standard size and condition property with a market value of £1,000,000, then clearly Property B would be worth less, and its value and price would need to take into account the additional cost required for the buyer to bring its presentation/condition back up to around a similar standard as Property A.
Once again, the value is what the buyer gets out of a property, not what the seller put in it. The value comes down to the buyers.
Getting in touch with me
If you would like to discuss any of the above points with me further, or if you need help or have any questions in general, click here to get in touch with me.
In this section, I have discussed what makes the presentation of a property ‘structural or major’ or not, for the purposes of determining the extent of its contribution to the value. Understanding the meaning and extent of ‘structural or major’ (or otherwise), not only helps to understand the contribution to the value, but also the influence to the asking price, especially if improvements have been carried out to the property.
So if you want to find out more on the meaning and extent of ‘structural or major’, come join me in the next section.