Most of us probably think of Commercial and Industrial property when we think of real estate as a potential investment.
However, real estate is a limited resource and demand for it is only tempered by economic conditions and the availability of financing. Hence, while not necessarily income producing, residential property is viewed as having qualities sought after by smart investors. Therefore, evaluating your home purchase from an investors perspective is important.Watch out for these warning signs:

• It's the biggest house on the block
  

  The principle of conformity holds that a house is more likely to reach its maximum value when a high degree of "homogeneity"(conformity) is maintained. In other words, it needs to be close in size to other homes in the neighborhood. If your house is the largest, its price should still be consistent with similar properties in its neighborhood market.
  
  

• It's significantly more expensive



The principle of Substitution holds that the marketplace will, in most instances, not pay more than the cost of a reasonable substitute. One of the key elements, influencing value, to consider in determining a substitute is location. As a result, the value of an over improved home in any neighborhood will be diminished by the close proximity of less expensive properties. If you pay substantially more for a house, than the top sales price in the neighborhood, you may have to re-sell for less than you paid.



• It's over-improved
  Both the principles of conformity and substitution apply when a house has improvements that do not conform with the average neighborhood home.

As a buyer, your awareness of the following factors could help you establish a fair price with the seller;

• Homes that have been offered for sale longer than the typical "Marketing Time" in the neighborhood. Typical "Marketing Time" can be established by running a Virtual Appraiser report on the property you wish to buy. The Virtual Appraiser identifies "Marketing Time" as "Dom" or days on market in its summary of "typical" values.
  If economic conditions and the availability of mortgage financing is good, but buyers express no interest, the probability of a material defect in the property or the house being over-priced is likely.

• Series of price reductions
  This indicates that the seller has already been on the market long enough to believe a price reduction was in order. If the seller's asking price needs reduction, the home was over-priced.

• Your Virtual Appraiser^TM report indicates a typical sales price less than you are considering offering.
  Unless the property is better than "typical" (a similar home in average condition), paying more for the property can be a point of irritation when its time for you to sell. If the home has been remodeled or updated, add a positive dollar amount to the Virtual Appraiser's, "Calculated Price". The dollar amount you add to the "Calculated Price" should not be the dollar for dollar cost of the remodeling or updating but the amount you are willing to pay above "typical" value. When your positive adjustment is added to the VA reports "Calculated Price" the total should not exceed the highest sale price of the comparable sales in your report. If the total exceeds the highest sale price, your target property may be over improved. In most cases it is unwise to pay more for a property than was paid for the best similar home in the neighborhood.

  Conversely, if your target property is in less than typical condition, estimate the cost of repairs and add your repair cost to the Virtual Appraisers "Calculated price". If the sum of these two numbers is greater than the highest sale price, of the homes in your report, the target property may be suffering from, "Incurable Depreciation". It is unwise to pay more for a property than you could resell for once repairs are complete. The asking price or offer to purchase, the property being appraised, should be adjusted downward accordingly.
  

Use the Virtual Appraiser^TM to improve your chances of getting money back when you sell." The property may not appreciate enough, during your period of ownership, to off-set the amount of your total investment. Especially if you have borrowed against most of your equity, or paid too much to begin with.

Appreciation is an increase in home values. If your home appreciates enough to be a profitable investment, that's a bonus, but you can't bank on appreciation when you buy a house.

The bottom line is that many experts advise buyers to consider appreciation a bonus, not a sure thing.

Just don't plan to retire on the profits when you sell.

Think of appreciation as the paper profits in real estate.

Your profits exist only on paper--in this case, your deed--until you actually sell the house.

Purchasing in a rapidly appreciating area, does not guarantee that property values will be the same or higher when it comes time to sell. The neighborhood market could lose its luster.

Buying during periods of market expansion, when demand drives prices up, requires larger initial investments. Like the stock market, the flip side of boom is bust, or at least correction. If you buy when prices are peaking, you may not receive a full return on your investment.

Appreciation is nice to have, but its not to be depended on when you buy a house. If you buy when demand is driving prices up, make your offer more favorable by offering to close early or reducing the number of contingencies. Increase your price as a last resort.

The national economy affects real estate appreciation: employment levels, business climate, housing supply and demand, affordability and interest rates.

A healthy economy and low interest rates drive demand, which pushes up prices and appreciation. Regional economies come into play as well, at times, causing housing prices to be more volatile.

Demographics plays a role, too. In the 1980s, housing demand soared as the huge number of people born in the 1940s and '50s became active in the market.

Many areas experienced appreciation that was greater than the rate of inflation. This made real estate a profitable investment.

In succeeding years lower demand slowed appreciation to below inflation, making real estate less profitable than other kinds of investments, such as mutual funds.

To understand the role of appreciation in your market, and in the neighborhood where you want to buy: Look at recent sales, in the local assessor's office and run a Virtual Appraiser report.^TM

Research public records at the tax assessor's office. You should be able to get a feel for sales volume, price direction, and whether final sales prices exceed asking prices (a sure sign of a quickly expanding neighborhood market).

Pay attention to business news. Examine reported real estate trends, inquire about new industries coming to your area or other economic changes that may dramatically affect housing supply and demand.

Research the recent appreciation history of the area where you want to buy. What are prices doing? Have they been volatile or stable over the years?

Is there a lot of new development nearby? A sudden glut in the supply of new housing can lower property values in existing areas.