Learning how to estimate and determine the value of our real asset property is not a difficult task and I believe it is something we must take our time to understand to avoid our property asset being under valued. The processes involved in calculating real property investment asset value are not complex or complicated to handle.
Many real estate investors or property owners must have at one time or the other needed or engaged the services ofreal estate valuers or appraisers to help determine or estimate the value of their property before they are listed in the online market for sale or lease.
Have you ever wondered why and how real estate valuers arrive at the market price tag placed on your real property or the methods used in determing the true worth of your real property.
To avoid your property being under valued you need to understand and equip yourself with some real estate valuation techniques and knowledge to be sure that your property get the best and most accurate valuation.
I find writing this article important and necessary because many properties are over or under valued in the real estate market mainly or due to lack of skills in valuation or property intentionally and delibrately under or over valued for personal gains, benefits or interest. This act do not only make property stay longer in the market if over valued but also let the property owners incure huge loss when properties are under valued.
This article will answer most of the questions you might have on real estate appraissing and I will also take my time to explain and show you some of the methods and processes used in estimating the true worth or value of a real estate property.
Real estate valuers usually employ three methods in determing real property value which are Cost Approach, Sales Comparison Approach and Income Capitalization Approach method.
Besides using these methods to estimate the value of real estate property, Valuers also consider it wise and important to evaluate and analyze the prevailing economic situation, market trends, environmental condition, government policies and regulations as it affects the smooth conveyance of ownership right from one person to another, availability of competing properties, the desire to own real property and the ability to meet the needs and desire of investors.
I will like to duck out of this analysis for us to focus our attention more on the aim of this article which is guiding you on how to determine the estimated value of your real properties. Let us quickly go back to our discussion on the three methods used by valuers.
The first method use by Valuers is the Cost Approach method, this is often time employ or use in estimating the value of real properties that have attachments or have been improved by one or more buildings such as schools, hospital, church, mosque and even government buildings.
In addition, cost approach allows estimation of real estate property to be conducted separately, simply put the value of the building and the land are estimated separately factoring in depreciation on the property.
This appraisal approach requires some processes and steps to arrive at the true worth of a real property. I will take my time to explain these steps one after the other.
1. The first step is to estimate the value of the land the property is sitting on using sale comparison approach which i will explain shortly.
2. After we have an estimated value of the land the next step is to determine the estimated cost of constructing the building, this should not be difficult to get.
3. Then what you need to do is to determine the amount of depreciation on improvements.
4. If you are right about the figures in the first three steps, you can now deduct the depreciation amount from the estimated construction cost of the building.
5. Finally, the total value of your real property can now be determined by adding together the depreciated cost of the building, estimated cost improvements and the estimated value of the land.
To know or estimate the useful life of an asset or the expected period of time an asset is said to be useful to the owner in order to calculate or estimate depreciation on such assets. Let us quickly check out some of the typical ranges of useful life estimate of investment assets.
1. Building and Improvements 10 – 50 years
2. Fencing 20 years
3. Furnitures and Fixtures 5 – 12 years
4. Grounds and Maintenance Equipments 15 years
5. Automotive Equipments 3 – 6 years
6. Playground Structures 20 years
7. Computer Equipments 5 years
To estimate depreciation on investment assets an investor must be able to determine the cost of the asset at the time of purchase or construction, the useful life of the asset or the expected period the asset can be productive.
The salvage value of the asset or the scrap value which is the value of the asset after its useful life elapsed, this is often time represented as zero value by most investors. For more accurate estimate values investors also factor in cost of maintenance and replacement that may arise due to changes in regulation and standards.
I would have love to give an example on how to estimate or determine depreciation on assets but that will take a little bit of our time and I don’t want to waste our precious time on that. Lets move on.
Another commonly use approach in estimating and determing the true worth of real properties is the Sale Comparison Approach which is often time refered to as the market data approach.
This approach allows market value of real estate property to be determined by comparing the property with similar properties with similar or same features, size and in the same location.
However, after the comparables are adequately done, the Valuer will now adjust dissimilar features to arrive at the market value of the property by factoring in the age, physical features and condition of the property; the date of sale, terms and conditions of the sales contract.
It is also worthy of note that sales comparison approach is the most used and prefered method of appraissing real estate property because of the instant availability of market data of comparables.
The last method of estimating and determing the value of your real estate property that i will discuss is the Income Capitalization Approach.
This approach solely rely on the rate of returns on investment and the net income the property asset generates. Investors can adopt this approach in estimating the true value of their property asset if they can predetermine the future income and expenses of their real property asset.
The term Capitalization Rate is the ratio of the net operating income NOI to property asset value and it is usually refered to as the Cap rate.
To help understand this concept of Capitalization Rate let us look at one instance.
If a property was listed for #20,000,000 ($45,000) and generated net operating income NOI of #2,000,000 ($4500) then the capitalization rate would be
Capitalization Rate = (NOI / PROPERTY ASSET VALUE) *100%
=( 2,000,000 / 20,000,000) * 100%
Direct Capitalization can be used to determine the value of real estate property investment that incorporates the capitalization rate. In determing investment capital cost all you need to do is to divide the net operating income NOI by the capitalization rate.
This is achieved by simply following these easy steps
1. Try to estimate the annual potential gross income.
2. Then determine the effective gross income, you can get this by checking your records on rent collected.
3. We now need to determine our annual net operating income of the property asset by deducting our annual operating expenses.
4. The next step is to estimate the capitalization rate and apply it to the real property asset annual net operating income to arrive at your property’s estimated value or true worth.
In conclussion, I really hope this article answered most of the questions you might have on how to appraise and determine the estimated value of your property asset investment. I also want to believe that you now know what to look out for whenever you engage the services of an Appraiser or a Valuer to assist you in estimating and determing the value of your property or better still if you feel like doing the appraissing yourself.
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