Forcing Value in Properties

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There are numerous ways that investors have found to increase the value of real estate. Below is a summary of some of those:

Changing the use and/or zoning. A principle taught in real estate fundamentals to all prospective real estate agents in their pre-licensing course, is the concept of finding the “highest and best use” for properties. It is not uncommon for a property to outlive its “highest and best use.” For example, as the population in an area grows sometimes farms are changed to subdivisions. The land the farmer uses is worth far more as home sites. Another common change is found when a home can be used as a commercial or business use. Sometimes the land is more valuable as a commercial use or the structure (home) and land can be converted to a business office. Purchasing property in the path of growth and change can bring very profitable returns. Sometimes it is as simple as changing the zoning on the property.

Many properties are valued or purchased more because of the ability to produce income. In other words, the income approach to value is more important than the cost or comparable sales approach to value. If an investor can find an opportunity to purchase a property that has the likelihood of being able to raise rents then it is very likely that the value of the property will be increased as well. Sometime, to be able to raise rents requires some improvement to the property as well, but not always.

Dividing the property to its smallest component. For example, taking a piece of land and subdividing it, or converting an apartment or office to a condominium. It frequently is not difficult to compare the cost of a residential condominium to the price per unit of an apartment that could make a good condominium. The structural and cosmetic difference if often not that significant. It is just that it was sold as a condominium instead of a multi-unit apartment.

Timing. Some people have said that the three most important components of making a good real estate investment is location, location, location. But most investors would actually agree that the three most important factors are timing, timing, and timing. When they buy and/or when they sell. A good example of this is during the times of the “Resolution Trust Corporation of America.” Shortly after the tax law change of 1986, millions of dollars of properties went into foreclosure. Many of those properties were purchased by investors, who later sold them for significant profits. The location of the property did not change, only the timing.

The Real Estate Cycle. Most real estate markets have the tendency to follow a cycle. This would suggest that sometimes the market is very strong with a high demand for product or a seller’s market. Other times there is an excess of supply that takes longer to sell and some would call this a buyer’s market. Nevertheless conditions in the marketplace change cycle from one condition to another. This is sometimes called the real estate cycle. A seller’s market is frequently accompanied with rising prices, increased construction, very high demand, and multiple offers, in the rental sector there would be very low vacancy, and rents would be rising. Eventually, if construction continues the market becomes over supplied creating an excess supply. At some point, the supply exceeds the demand such that prices soften, construction slows down, it takes longer to sell product, and it becomes a buyer’s market. In the rental sector, we get increase in vacancy, rent concessions, and falling rents. Eventually with the lack of construction, product has been absorbed and demand again exceeds supply.