It is important to various enterprise’s to estimate the value of actual property. This estimate includes real estate funding, listing of real estate with the purpose of sale, analysis of investments, insurance of property and tax collection of real estate. Most of the people determines the valuation of real estate by asking or purchasing the price of property. In this article you are introduced with the basic concepts and methods of real estate valuation.
Basic Concepts related to Valuation
Value: To appraise the determination of property’s value is its main consideration. The ownership of real estate property arises the future benefits from present worth. Many consumer goods are used rapidly and over the long period of time the benefits of real estate property are identified. During estimating the property’s value, the various economic and social trends should be considered into account in accordance with government regulations and environmental conditions that have an influence on four elements of value:
Demand: the ambition or need for ownership financed by the financial means to gratify the desire
Utility: the strength to gratify the owner’s ambition or needs
Scarcity: the limited supply of contending properties
Transfer-ability: the ease of transferring the ownership rights
Value vs Cost and Price
Value is not importantly as cost and price. Cost means actual expenditures including cost incurred on material and labor. Price is the amount of money that is paid by someone for something. Cost and Price have an effect on value so it cannot be used for the determination of value.
An evaluation may be an opinion or estimate regarding the value of property on a particular date. Government agencies, individuals, investors, business man and mortgage lenders used these evaluation reports in taking important decisions of real estate transactions. To determine a property’s market value is the main goal of preparing appraisal. The most reasonable price is that the property marks in a competitive and open market. In general, Market Price is that price at which the property sells in the market and not always represent the market price.
Methods of Appraisal
A detailed appraisal is a methodical collection of data. Precise data which covers details of the property and normal data like nation, region, city and neighborhood in which the property is located. All these information are collected and analyzed to arrive at a value. To determine the value of property, three basic approaches are used:
Method 1: Sales Comparison Approach
This approach is used to value the single family homes and land. It is also called the market data approach. This estimate is prepared by comparing the prices of recently sold properties with similar characteristics. These type of similar properties are referred to as comparable and to have an official comparison, each must be:
- More similar to the subject property as possible
- Must be sold within the last year in a wide and competitive market
- Must be sold under typical market conditions
Method 2: Cost Approach
This approach is used to determine the value of properties that have been enhanced by one or more buildings. In this method, several estimates are prepared for the value of the buildings and the land considering the depreciation value. Together, these estimates are added to calculate the value for the entire improve property.
This cost can be estimated in different ways in which the square foot method is used to calculate the cost per square foot of recently built is multiplied by the number of building in the subjected building.
It is that type of condition in which the value or property is negatively affected and should be taken into consideration in the form of physical deterioration, economic and functional obsolescence.
Method 3: Income Capitalization Approach
This approach is used the relationship between the rate of return of an investor and the net income produce by the company. This third method of real estate valuation is used for estimating the value of properties related to income production such as complexes, office buildings etc.
Gross Income Multipliers
This method is used to estimate the value of properties that are not purchased as income producing properties but they may be rented.
Gross Income Multiplier = Sales Price/Rental Income