A cost value analysis is a valuable financial tool to use for complex construction scenarios such as renovate or sell and build new or buy when it comes to property improvement questions in owners’ evaluation.
The cost value analysis can also be used to access the price to value when it comes time selecting different range of building products and labor craftsmanship options.
When homeowners begin considering different home remodeling projects they are initially focused on esthetically improving the function and appearance of their home.
As the owners learning curve develops, they begin to realize that the new home construction and home renovation process is complex and includes many moving parts.
Even a common house remodeling projects such as bathroom or kitchen remodel updating can get confusing comparing the many different updating options.
During the early stages of any home improvement evaluation process or new home construction, the owner should begin researching how there remodeling plans will affect their after-repair market price, which is a required calculated estimated market price of the property after improvements are complete.
The cost value analysis process is a combination of market data such as cost and market prices and the combination of perceived value drive by experience and emotion.
In order to properly understand market price, we need to provide guidelines for definition. Value is objectively and subjective perspective shaped by tangible comparisons as well as the emotions it evokes in each of us.
By just conducting some market research for objective comparisons it becomes easier for most buyers and sellers to measure and evaluate market price.
But without an emotional connection the buyers will have some level of difficulty rationalizing the need for their purchase.
The word value can also be defined more effectively by examining the many factors that distinguish and characterize the factors why buyers and sellers perceive home market value defined through the quality level of both service and products used.
We will approach this discussion by examining the characteristics that define value. We then will discuss the physical aspects that have an impactful effect on home market price.
We will conclude this article by examining the less clearly defined contribution to value from the emotional factors.
Learn about the characteristic factors of cost value analysis for construction in Houston
The cost value analysis begins with 4 primary factors;
- Value Characteristics
- Physical Characteristics
- Appraisal Value
- Quality Workmanship
- Cost Value Analysis Perception
Value Characteristics
For home improvements to obtain value there must be certain improvement present and perceived for other potential owners of the property in the future.
There are four principal characteristics that must be present for your home improvement project to reach maximum worth. There are demand, utility, scarcity and transferability.
Demand – Value requires the element of demand to fulfill its potential. There must be a verifiable desire and legitimate motivation to complete the transaction.
Demand can be materially affected by price and other valuable consideration. The common laws of economics suggest that as the price goes higher, demand will reduce and vice-versa.
Utility – Is the functional worth that a user perceives. The user must expect some level of usefulness to justify their need.
This could represent a minimum number of bedrooms in the home or living square footage to be functionally compliant.
Other factors that can affect the utility value element is restrictive factors such as HOA architectural committee requirements for home improvements. These types of restrictive conditions can materially affect the cost of improvements and the price of the property.
Scarcity – The supply of a common home improvement or lack of uniqueness can also have a substantial impact on the house price.
The scarcity can have a huge effect on the overall market price. The scarcer the results of a well-crafted remodeling project the greater worth.
Transferability – There must be a free ability to willfully transfer the home with improvements that are in demand. The greater the restrictions on the property title the lower the price.
Physical Characteristics
Homes have special physical characteristics that are unique to real estate. They are the location and the uniqueness of the property and improvements.
Either of these two physical characteristics can significantly increase or decrease the price of a home.
Uniqueness – Each property consists of an individual piece of land and a house. The greater the uniqueness of each tangible component, the greater the market value.
The uniqueness can be perceived in the features of the home’s architecture or the home improvements that buyers find desirable.
Uniqueness is also perceived in the features of the home site. Home lots that have large yards or an abundance of trees or water front are considered a higher price. This is due to a combination of uniqueness, scarcity and location. The more physical characteristics and value characteristics the greater the uniqueness.
Location – Is considered to be the greatest single factor to solely effect the market price of a property.
This applies to the attributes of the lot as well as the neighborhood when assessing the immediate local market prices.
Market price historically increases greater on land located near the central part of a city. In most major cities there is an area that is the price leader for property values.
In Houston it is the Galleria area that leads land pricing for commercial as well as residential properties.
Appraisal Value
The appraisal value is an estimation market price for financial lending institutions and tax district assessments.
The property estimation process is an opinion of value of a specific property at a specific period in time.
A real estate appraiser is state certified and requires a state license to practice to perform real estate appraisals.
Real estate appraisals are based upon the highest and best use of a property. There are 4 primary definitions in determining the appraisal price.
Market Value – This is defined by the agreed upon fair market price determined by a willing seller and willing buyer in transaction where the parties acted with full knowledge, prudently and without compulsion.
Investment Value – Is defined as the difference between market price and purchase price that a perspective owner would be willing to pay to achieve their operational objectives. The investment price will be the amount to motivate the investor to complete the transaction.
Insurable Value – The insured value is estimated cost of the property less the land appraisal cost. This value can be based upon replacement cost or appraisal price.
Liquidation Value – The liquidation value can have several meanings. First is the actual price that is realized less the market listing price after a normal period of proper marketing.
The second meaning is when the bankruptcy court imposes a forced liquidation or an ordered liquidation.
The seller is forced to sell at a price less then market worth to meet the obligations of a lien holder.
Cost Value Analysis Perception
Represents the difference of what a property is actually worth (market price) and what it cost to purchase (price) during a real estate transaction.
The price paid for a property seldom reflects the actual market cost of a property.
There are other factors that cause the price to be either higher or lower than the market cost. These are often referred to as a premium (higher price paid than market price) or a discount (lower price paid than market price).
The economic factors that affect the price premiums and price discounts can be imposed through either systemic or non-systemic market conditions.
Systemic market conditions are factors such as interest rates or current levels of unemployment forces imposed on the economy and the market’s overall reaction. Systemic conditions are usually outside the controls of the buyer and seller.
Non systemic factors are commonly in control of the buyer or seller’s control. These items include such things as poor maintenance, financial distress conditions and poor marketing strategies that can affect the property negatively.
Factors such as good marketing strategies, property scarcity and uniqueness can cause a property to sell for a premium.
Quality Craftsmanship
The words quality craftsmanship or quality workmanship are grossly over used in the new custom home construction and remodeling industry.
If every contractor claims they have top quality workmanship, why are there so many warranty call backs and home products being replaced for new work completed?
Quality craftsmanship starts with an attitude to provide the very best in products, materials and labor. When Lexus began making premium automobiles it was with the intentions of offering a superior product that was extremely reliable.
If your new Lexus required warranty or service that it would be a concierge service approach, which included loaner cars, appointment times and a lifelong service attendant assigned to the car.
The car would include premium product components such as Bose stereo systems, lush leather interiors and driving features to make the driver comfortable beyond standard needs.
This is how high-end home remodeling and new upscale home construction quality standards are arrived at.
Exceptional products are selected for the use in feature locations such as kitchens and bathrooms. Products like premium windows, doors and millworks are used to distinguish a separating finished look.
Tighter construction supervision is warranted to confirm a quality assurance program. The combination of these elements creates a greater sense of worth.
All these factors are employed to create an uncompromising home product and service experience that satisfies the owners senses and needs.
The home product and service rendered translate into a special form of value. After the concierge service is completed the innate value of the home’s quality craftsmanship will continue to transfer worth through reliable long-lasting service and the perceived worth expressed to future buyers.
This is a cost value that is usually found in high priced luxury homes.
