SIX RULES IN PROPERTY INVESTMENT - Rule No 3

Rule No. 3: Understand the Value of Your Investment

Price is a term used for the amount asked, offered, or paid for goods or services. It is a an unchanging fact, whether publicly disclosed or kept private. Because of the financial capabilities, motivations or special interests of a given buyer and seller, the price paid for goods or services may or may not have any relation to the value which might be ascribed to the goods or services by others. Price is, however, generally an indication of a relative value placed upon the goods or services by the particular buyer and/or seller under particular circumstances.

Cost is the price paid for goods or services, or the amount required to create or produce the goods or services. When completed, it is a historical fact. The price paid for a type of goods or service becomes the cost to the buyer.

Value is an economic concept referring to the monetary relationship between goods and services available for purchase and those who buy and sell them. Value is not a fact, but an estimate of the worth of goods and services at a given time in accordance with a particular definition of value. The economic concept of value reflects a market’s view of the benefits which accrues to one who owns the goods or receives the services as of the effective date of the value.

For property investment, understanding the concept of value, price and cost is very important. As rules of thumb: -
·If the value is much higher than the price offered, then the property is worthwhile investment;
·If the value is below the price offered, the investor should predict if there is any opportunity to enhance the value of the offer. If not, then it is not advisable to purchase the property;
·If the value is higher than the price offered, and additional costs are incurred to repair or maintain the property ehich will affect its value, then it is not advisable to purchase the property.

In property development, certain developers are very much cost concern and neglect the value of the product. For instance, these developers determine the construction cost of the product, add on the profit and determine the selling price. Sometime the price that these developers fix does not actually reflect the value that is acceptable for potential purchasers. It might end up being over-priced or under-priced.

On the other hand, some developers study the market force such as demand and supply, purchasing power, etc., and understand the value of the product that is acceptable for the purchaser. From this point of view, the developers might fix the selling price slightly lower than the market value of the product and thence budget the construction costs. By reducing the selling price of the product, it creates room for investors to make money and increase the marketability indirectly.

Apart from looking at the market value, experienced and far-sighted investors also look at other types of value of the property: -

Hope Value
An increase in the value of the land produced by a belief that there is a chance that the demand for that land will change significantly.

Marriage Value
An increase in value, or a release of latent value, brought about either by the merging of two interests in the same property or the merging of two adjoining or contiguous properties into common ownership.

Existing Use Value
The Market Value of the land with the benefit of existing use rights only.

Development Value
The latent value in a property that could be realised by carrying out development work. The value could alter significantly by a subsequent grant of consent to carry out a new form of development or a change of use.

Forced Sale Value
The amount that may reasonably be received from the sale of a property (forced sale) on conditions that do not meet all the criteria of a normal market transaction.

Highest and Best Use Value
The likely use, selected from a number of available choices, to which land may be put, in compliance with planning and building regulations, produces the most profitable present land value.

Alternative Use Value
The value of the land or buildings on the assumption that they are or may be put to use that is different from the current use.