Property Valuation Methods Real Estate Investors Should Know
Accurate property valuation is crucial in any real estate market. Realtors and investors use various methods and approaches to acquire the accurate value of a property.
A quintessential aspect of real estate investing is being able to discern the exact worth or valuation of the property based on the data they accumulate. Even two properties were the same in structure and appearance, digging a little deeper into their history may reveal that they vary in their closing price.
Typically, residential property valuations in Bendigo are conducted by professional property evaluation companies who have the experience and resources to come up with a justifiably profitable price for the property. They follow specific guidelines and methods to conduct authentic property evaluations. Find out more by reading this article.
How to understand Real Estate Valuation :
In real estate, evaluating a property is about determining how much a property is worth. To find out the valuation there are several variables, for instance, determining how much the property would be worth in a few years. This process can turn out to be quite tricky, especially since the cost of the property and its sale price may not ascertain its actual value.
The cost of the property includes expenditures like raw materials, labour costs and so on. Intrinsic factors like curb appeal and the suitability of its surroundings are not considered. The price of the property, on the other hand, takes into account both the cost and effects of external factors. However, it is still not a worthy determinant of the actual value of the property.
For example, an individual purchases a single-family house at a valuation of $600,000. This amount may not necessarily reflect its actual value. Upon inspection, certain imperfections may be revealed such as cracks in the ceiling or walls. These issues would also be taken into account when determining the value of the property. Many such factors also play a part in finding out the actual worth but may not be reflected in the market price.
The ideal way to assess a property's true value is through the fair market value. Assuming that both the seller and the buyer are rational actors in the economy, a fair market value is an opinion on what the property would sell for in a competitive real estate market.
Formal appraisal reports are extremely useful in finding out the true market value, however, this requires comprehensive data.
Aspects of Property Evaluation :
Anyone who has decided to evaluate their property should take into consideration the following factors ;
[A] Market Conditions :
One should perceive the conditions of the market as conceptual inputs. Factors like Demand and Scarcity will have a significant effect on the value of the properties in a specific area.
The difference between Demand and Scarcity would go on to say whether it is a buyer's market or seller's market. If a lot of people are buying property in an area but there are not enough properties, then the ball is in the seller's court making it a 'seller's market'.
If fewer people are buying a property when there are plenty of units to sell, it becomes a 'buyer's market'. In a seller's market, the value of homes increases in the sellers' favour while in a buyer's market the advantage is more on the buyer's side, decreasing the market's fire.
[B] The Property :
Once all conceptual data has been accumulated, it is time to put the property under the magnifying glass ;
(1) Mortgage Payments :
Factors like mortgage payments including property taxes and insurance need to be taken into account.
(2) Down Payment :
This factor depends entirely on the mortgage.
(3) Rental Income :
When it comes to properties that generate rental income, calculating the regularity of the cash flow needs to be taken into account. This can be done by considering the gross rental yield which is obtained by dividing the annual gross rent by the purchase price of the property.
However, it must be noted that none of these factors takes into account the cost of maintaining the property.
(4) Capitalization Rate :
This commonly applies to commercial properties. The capitalization rate is an estimation of the rate of return obtained on investing in a property. It can be derived by diving NOI or Net Operating Income by the value of the property. It can also be perceived as the gross rental yield which also includes operating expenses.
Three Approaches to Real Estate Evaluation :
(A) Sales Comparison Approach :
In the case of evaluating a single-family home, the market value can be estimated by analyzing three or five properties with similar traits. The homes included in this list should consist of properties that are located in the same neighbourhood. They should be approximately the same size and should have been scolded recently. These are known as "comparable sales" or "comps".
The price of the property needs to be adjusted according to the price of these comps to get a hand at the authentic price. This is a nearly identical method to the comparative market analysis.
(B) Cost Approach :
The cost approach assumes that a rational buyer would not pay more than the cost of building the structure. This is why it includes the value of the land and the cost of construction. Using the sales comparison approach the value of the land before its use is estimated. It must be noted that the land cannot depreciate.
The value of the building is calculated using the following three methods ;
 The Square Foot Method : The cost per square foot of the building that was recently sold according to the property's square footage.
 Unit-in-Place Method : The unit costs of each component are calculated to reproduce the structure and are all added up together.
 Quality Survey Method : Factors like materials, permits and labour costs are added up to calculate the value of the building. However, this requires the details of everything from nails and wood used in the construction.
(C) Income Approach :
This approach is used on properties that generate revenue, for example, an apartment building. The value is obtained by dividing the net operating income of the property (gained by subtracting expenses from revenue) divided by the capitalization rate. This will give the returns that will be earned by the property over time.
To gain an accurate valuation of a property, it is crucial to achieving a balance between the different methods used.
This requires the expertise of professional property valuation companies in Melbourne. Then again, having an accurate understanding of these methodologies will benefit sellers and investors of real estate .