If you’re planning to buy a house, evaluating the price is a crucial step to ensure you’re getting a fair deal.
We yet talked about Rent or Buy an home. In any case you have to read this post. There are several methods and techniques to evaluate the price of a house. I will explain you one of the most commonly used that is based on merit coefficients. In this guide, I’ll explain what merit coefficients are and how they can be used in combination with other valuation methods such as the comparative method or the income method to determine the fair price of a house.
What are Merit Coefficients?
Merit coefficients are used to evaluate the characteristics and conditions of a property and determine its value. They take into account factors such as the condition of the property, location, size and other important details that can affect the price of a house.
Examples of Merit Coefficients
- Condition Coefficient. This merit coefficient takes into account the state of preservation and maintenance of the property. A property in excellent condition will have a higher condition coefficient than one in poor condition.
- Location Coefficient. This merit coefficient takes into account the geographic location of the property and its proximity to services and infrastructure. A property located in a central area or in a high-demand area will have a higher location coefficient. On the contrary, one located in a peripheral or less-demanded area will have a lower one.
Using Merit Coefficients and Formulas to Evaluate the Price of a House
Merit coefficients can be adapted to the specific needs of the local real estate market. Additionally, to determine the price of a property, mathematical formulas are a good starting point. In this way we can take into account all merit coefficients and other factors to have a better estimate.
For example, a formula used to determine the price of a property may be:
price = condition coefficient x location coefficient x property size x market coefficient.
This formula is just an example and may vary depending on the valuation method used.
Other Valuation Methods
- Comparative Method. This method compares the subject property to similar properties that have recently sold in the area to determine its value.
- Income Method. This method evaluates the income-producing potential of a property, such as rental income, to determine its value.
For example, let’s say you’re evaluating a house with a condition coefficient of 0.9, a location coefficient of 1.2 and a property size of 1,500 square feet. By comparing the subject property to similar properties that have recently sold in the area, you determine that the market coefficient is 1.1. You also know that the expected annual rental income of the property is $24,000. Using the formulas you can determine the price of the property as follows:
Price = condition coefficient x location coefficient x property size x market coefficient = 0.9 x 1.2 x 1,500 x 1.1 = $219,400
In addition, you can use the income method to determine the value of the property by dividing the annual rental income by a capitalization rate. This can give you an additional perspective on the value of the property.
In conclusion, evaluating the price of a house is complex. Requires analysis of variables, use of specific methods and techniques such as merit coefficients, comparative method, and income method. It’s worth considering combining different methods and techniques to get a more accurate understanding of the value of a property.