The most fundamental component of any real estate transaction is the idea of fair market value (FMV). This essentially refers to the price at which a property would change hands between a willing buyer and a willing seller. The ‘fair’ part means that either party is assumed to have reasonable knowledge of all the relevant facts and that neither is under any pressure to buy or sell.
FMV affects the likes of:
- buying and selling
- setting up rental agreements
- calculating liabilities for property-related taxes.
The fair market value of any property is determined by analysing various internal and external factors. Among the most influential are its location, size, condition, comparable properties in the area, current market trends and the overall economic climate.
By accounting for these factors and more in a holistic investigation, professional property valuers can determine either the past or current market value of any type of property.
Buyers and renters can use this information as protection from overpaying, while sellers and investors can use it to set a competitive, fair and profitable price for their property.
When it comes to tax, local authorities generally levy property taxes based on the assessed FMV. For this reason, knowing your property’s value will ensure that you pay the appropriate taxes. This value can also be essential in inheritance or divorce settlements, where assets need to be divided fairly.
Overall, FMV is a benchmark for equitable and transparent real estate transactions.
Current vs retrospective market value
To reiterate: when we speak about fair market value, we generally distinguish between current and retrospective market values. The distinctions and interplay between the two are crucial to anyone involved in real estate and are often used to dictate significant financial decisions.
As the name suggests, the current market value reflects the present worth of a property, considering various factors such as demand, supply, location and economic trends.
In other words, it is the value a property can fetch under the existing market conditions. Real estate professionals, investors and buyers rely heavily on current market values to make immediate decisions regarding buying, selling or investing in properties.
Conversely, retrospective market value delves into the historical performance of a property, analysing its past worth over a specific period.
This provides valuable insights into a property's growth trajectory, showcasing how its value has appreciated or depreciated over time.
This value is for long-term investors and analysts, allowing them to:
- gauge market trends
- forecast future values
- assess the property's overall potential.
It is also the core component of calculating a property’s owner’s capital gains tax liability, as this tax is charged based on the profit earned from selling a property.
The synergy between these two values is critical in real estate decision-making. While current market value guides immediate transactions and short-term investments, retrospective market value offers a strategic perspective, aiding in long-range planning and risk management.
The economy’s influence on FMV
At this point, you might be wondering what most affects the FMV of real estate. While there is a wide range of factors to consider, the economy wields a significant influence here.
Purchasing power, and therefore property values, are directly affected by the likes of:
- economic stability
- employment rates
- income levels.
High consumer confidence stimulates demand for properties during economic booms. This, in turn, elevates real estate values. Meanwhile, economic downturns lead to reduced consumer spending and demand, causing property values to decline.
Interest rates set by central banks also shape property values.
Low interest rates encourage borrowing, increasing demand for real estate and driving up prices. High interest rates deter borrowing and investment, reducing demand and property values.
Vitally, economic sectors influence property values regionally. For example, areas near thriving industries or commercial centres often experience higher property values due to increased job opportunities. Infrastructure development enhances accessibility.
The role of inflation is important as well. High levels of inflation erode purchasing power. Real estate often serves as a hedge against inflation, with property values rising to preserve wealth.
To summarise, the role of the economy in real estate values is a significant part of what makes property such a dynamic and risky investment venture.
Improving a property’s FMV
It’s important to note, as a property owner, that your investment’s value is not entirely beyond your control. In fact, with a strategic approach to enhancing both its structural integrity and aesthetic appeal, you can produce tangible results that impact the market value of the property.
One of the most impactful ways to increase a property's value is through renovations and repairs.
Addressing issues like plumbing, electrical systems and roof repairs not only ensures safety but also boosts the property's market worth. Solar panels or other energy-efficient appliances and upgrades are great ways to attract environmentally conscious buyers and reduce operational costs.
Enhancing the kerb appeal is equally essential. This could include:
- landscaping
- exterior painting
- driveway repairs.
It’s anything that can be done to create a positive first impression, enticing potential buyers.
Additionally, expanding living spaces, such as adding a deck, patio or extra room, can significantly raise the property’s value, especially if these additions align with popular trends or local preferences.
Upgrading interior features, like kitchens and bathrooms, is a classic way to modernise the property.
Be sure to use high-quality materials and finishes for a touch of luxury. Smart home technology, such as security systems and thermostats, can also add desirability and appeal to the tech-savvy.
Finally, investing in regular maintenance is crucial. A well-maintained property not only retains its value but also prevents minor issues from escalating into costly repairs or depreciation.
If you’d like a professional inspection of your property that can help to identify key areas for improvement, enlist the services of a property valuation company near you.