Every single property in your portfolio is subject to depreciation. There are costs associated with such depreciating factors. The real estate market is not a perfect market, many have the foolish belief that if they purchase a property in a certain location, it is guaranteed to increase in value, there are many factors that can depreciate your property value. People focus on the aesthetic factors but neglect to consider that the real estate market is conditioned to be a monopolistic playground. There are so many factors that actually contribute to its imperfection. One of the worst contributors has to be the heterogeneity of the property in question. That is basically the age of the property, the location, the quality of the structure and its size.
Another misconception occurs when you walk into the average real estate agency, the average agent of that establishment may compare the real estate market to a supply and demand funnel sort of thing. Such an analogy would naturally allude to a competitive structure. Completely inaccurate, you see pricing is in fact not determined by the competition of buyers interested in a particular commodity, in this case all references are with regard to the property sector. Prices are actually determined by an infrequency in terms of trades. The proper method to gather information is to focus on asymmetrical data.
So when you are searching for an investment opportunity, you cannot focus on the supply and demand model, you need to equip your research with a cost of alternatives, therefore you are inadvertently shifting the switch to a strategy that will maximize your profits. Now, bear in mind that the pricing structure of the housing market is sometimes inefficient.
There are so many segmentations within the property market that such a complex aggregation of the sub-markets usually stifle the distinguishable characteristics in terms of demand and supply. Sub-markets affect the prices of surrounding areas. Therefore if the home you are planning to purchase is near an area that would be considered unsavory, the value of the property in the slightly better neighborhood would diminish and gradually depreciate, you see bad neighborhoods tend to spread outwards, they never stay stagnant in the epicenter of their origin.
If you have the good fortune of time when analyzing the various neighborhoods, consider how long the available stock is left to stagnate, that will give you an indication of whether to purchase the property or not. A good question to ask your property agent is, “How long has this property been on the market?”.
These are the main areas of concern for you to ponder after you have viewed the property:
1. Is the Property overpriced?
2. Is the location of the house situated near to a bad neighborhood?
3. Are there any defects that are not visible to the naked eye?
When a house has been on the market for long, the agent and other agents will have probably given up on selling it, even the owners will have adopted a despondent demeanor. Lets say a property is listed at $900,000 and it has been on the market for several months. There are no offers or if there was any offers, none were accepted. If it is possible, find out what offer was made to the seller. If someone offered $750,000. This is a perfect time to offer far less on it. Try your luck and offer $725,000. Yes, the owners may be insulted but they will be more willing to negotiate with you. The property is cold. People may not care to view it for another few months.
This is why you should not focus on the supply and demand model as many agents will try to push properties on you that are fresh. The older stock are forgotten because the agents have lost hope to sell it. The wise and clever individuals can purchase a great deal for much less and score a fantastic investment.