Category: Real Estate

10/10/2019


Real Estate Valuation Methods

Real Estate Valuation Methods

Table of contents:

How to Value Real Estate?

It can be challenging to find an appropriate valuation for real estate that you own or are looking to purchase for a number of notable reasons. All real estate is different and minor changes in where residential or commercial real estate is located can have a significant impact on the ending valuation of the property. Further, since real estate is not a liquid market and there are costs associated with buying and selling property, it can be challenging to quickly understand the value of real estate that you own or are looking to buy.

It is incredibly important to consider the value of the property you are selling when you are identifying “how to sell my house” and what price to sell your home for. Here are some of the various methods that are commonly used to value property and what value estimator resources are available to do so. It is also a good idea to consider companies that can provide a market valuation for property you are looking to value.

Comparable Sales

One of the most common ways that real estate is valued is through the use of comparable properties. A real estate agent will review your property and search for other homes or property in the area that have similarities to your property and identify their average sale price. Then, adjustments to their sales price are updated for differences in the property being valued to the property that was sold in order to obtain at a reasonable estimate of its value.

Comparable analysis can provide a good overall assessment of a property, but a homeowner or homebuyer should take into account the unique characteristics of their property and determine the adjustment needed to arrive at the right market valuation.

Appraisals

Property is often valued by an appraiser who is knowledgeable about the real estate market where you are operating and can assess the likely value of the property. Of course, these appraisers will also look into comparable sales, but will factor in other items such as the long and short-term potential of the market and factors that are unique to the property. While comparable sale analysis will also attempt to take into account these factors, a trained appraiser or inspector is specifically trained to look for these problems and often have engineers on hand who can assess the potential problems of unusual items such as pest infestations or the presence of asbestos.

Appraisals

Many people have a formal appraisal done as part of the mortgage pre-approval process that services as a good value estimator. However, a mortgage lender will choose companies that provide appraisal services and they are trying to manage their own risk with a loan and are looking for conservative estimates of homes. The thought that mortgage lenders use is that the mortgage loan should not be for an amount greater than the appraised value and appraisers hired by mortgage lenders tend to be conservative. Homeowners and buyers should consider these appraisals but should weather them with their own knowledge and expectations and consider hiring their own appraisers when performing the valuation of the property.

Present Value of Future Cash Flows

Businesses, rental residential real estate, and commercial real estate are commonly valued based on the present value of future cash flows and can be used to determine the value of the property. Under this valuation technique, property is valued based on the amount that you can rent it out for in the coming years and the anticipated sale price at a future date, all of which are discounted back to the current period. Consideration of the costs to maintain and lease the property should also be part of this equation.

It can be challenging to determine the present value of future cash flows as there are always many unknowns when doing so, including the discount rate that you are going to use in the calculation. However, consideration of what cash you can extract from the property in the future is a good gauge for determining what it’s worth is today and running the calculation with a few different rates and scenarios and then taking an average of the calculations can provide a decent calculation method.

Replacement Cost

One method that is sometimes used to determine the value of property is the replacement cost of the property. In situations where there are many regulations and other barriers in place that prevent the building of alternative structures, this can more accurately demonstrate the value of the property that you are attempting to value. Often, however, the replacement cost of the property is only one in a number of data points that can be useful in determining what the value of property is.

Real estate is one of the more challenging items to evaluation for pricing purposes. This challenge provides a huge opportunity for both buyers and sellers of property who can often find significantly mis-valued property as a result. Remember that the value of anything is the price that others are willing to pay for it, now and in the future, and consider valuing the property from numerous views when assessing its value and the price to buy or sell it for.


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