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How Real Estate Prices Are Calculated


Estimating the market value of a property is extremely important before buying or purchasing it. Generally, a licensed appraiser performs these calculations and supervises these transactions after determining the current value or “real price” of a property. However, even homeowners can determine the roundabout real prices of their property for having a rough idea.


This article comprises of information on calculating market values of homes or plots by applying different methods.
1] Comparable is a popular and the easiest method of computing property process. It is frequently used by property assessment officers and real estate agents. In this method a person researches the neighborhood to look for properties that have been sold in last 12 months. Thus properties of same size are classified under different groups and their condition is evaluated. Accordingly the prices are allotted to individual assets and an average price is computed for a distinct category. This is a “guess” method of calculating real prices.

2] Replacement value calculation is applied when no similar plots or houses are available for comparison. In this method, the cost of construction and time of survival is written down separately. Next, the present cost of constructing a house in that particular region is estimated. Now, depending upon the condition of property, the depreciation or appraisal percentage is subtracted or added respectively in order to compute the prices.

3] Price to Earnings Ratio or Price to Rent Ratio is a method of computing the real prices of a home or apartment, depending upon the amount of rent a tenant is willing to pay for it. The current P/E ratio of apartment in most nations is 16. Therefore, if the monthly rent of a house is $800 then its annual rental will be $800 X 12 that is $9,600. Thus, its true value is calculated as $9,600 X 16 which is $153,600.


These were some common methods of calculating market values. Now we shall analyze the factors that affect this calculation.

  • Condition of the property is first and foremost feature that affects your transactions. It is directly proportional to its depreciation or appraisal value. A renovated, fully furnished home is of higher value then a newly constructed or an old, unmaintained home. Also, presence of special features like barbeques, pools and terrace gardens enhances the real prices further.
  • Secondly, location is yet another determining factor. For instance, if your piece of land is located in a commercial region, surrounded by many multinational companies and educational institutions, bidders will submit high value proposals for purchasing it. On the contrary, remote or rural properties are of lesser value.

Tips and comments

While calculating the real prices of different components, it is essential for you to remember certain thing. For example, the average price of a swimming pool shall always be higher than it actual value. Land is not insurable therefore land values are not considered for insurance purposes. Lastly, different financial institutions have their personalized parameters to judge your assets. They choose a method which is convenient to them. Thus, witnessing the current trends, you may use online calculators to estimate these costs.

By Smita, published at 02/14/2012
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