Real Estate
Investment
The term MARKET VALUE
explained
This is how the Appraisal Foundation's Uniform Standards of
Professional Appraisal Practice or AFUSPAP, describes the term market
value: the most probable price a property should fetch in a competitive
and open market while all conditions requisite to a fair sale are
prevailing, the buyer and seller each acting prudently and knowledgeably,
and also assuming the sale price is not affected by unnatural conditions
of any sort.
Assessed Value
Vs Appraised Value
The difference between
a real estate property's tax-assessed value and its appraised value is as
mentioned below:
1. The
Tax-assessed value is the value that is established by the local taxing
authority for a piece of land and the improvements that may be placed upon
the land for property tax purposes. For instance, in Florida,
owner-occupied single-family houses are normally assessed at around
seventy percent of their fair market value by certified county property
appraisers.
2. The Appraised
value is the value estimate given to a real estate property by a licensed
property appraiser using accepted appraisal methods for the type of
property that is being appraised. For instance, the accepted appraisal
method to accurately estimate the fair market value for an owner-occupied
single-family house is done by the comparison sales method where a
property's value is based on the recent sale of comparable properties
within the same vicinity.
Common Methods
Employed to Estimate Property Values
The three most common
methods that are put to use by property appraisers to estimate property
values are the:
1. Comparison
Sales Method: As per the comparison sales method, basis of a property's
value is on prices of any recent sales of properties that are within the
same area and are comparable in size, quality, amenities as well as
features.
2. Income
Method: The income method is used to estimate the value of an income
generating property based on the net income that the property
generates.
3. Replacement
Cost Method: The replacement cost method is based on the estimate of what
it would cost to make repairs so as to make improvements on the property
using similar construction materials and construction methods.
How does the
Comparison Sales Method work?
The comparison sales
method of estimating the value of a real estate property is based on the
recent sale prices of properties within the same area that are comparable
in size, amenities and features. In order to ensure that these estimates
are accurate, sale price adjustments must be made for comparable
properties that have been sold at unrealistically low prices or on overly
favorable financial terms that are not usually readily available to the
common buying public.
More About the
Income Method of Estimating a Property's Value
The income method is
used to estimate the value of an income generating property based on the
net income that the property yields. Under the income method, the value of
the property is calculated using the following:
1.
Capitalization Rate. The capitalization rate also known as the cap
rate is calculated by dividing a real estate property's annual net
operating income by its purchase price.
2. Gross Rent
Multiplier. The gross rent multiplier also known as the GRM is calculated
by dividing the purchase price by the real estate property's monthly gross
operating income.
The Best
Approach to Estimate a Property's Current Market Value
It is best to use the
following eight-step approach and the current value worksheet to get a
rough estimate of a potential real estate investment property's current
market value:
1. Visit your
local county's property appraiser or assessor's website to obtain the tax
assessed value of the real estate property under consideration.
2. Locate your
county's property tax rolls for recent sales of three to five properties
that are comparable in size, amenities and features, and within two miles
of the property under consideration.
3. Analyze any
comparable properties that you may find, and make sale price adjustments
for differences in amenities, special features and the real estate
property's physical condition.
4. Verify the
income and expenses that are listed on the income and expense statement of
the real estate property under consideration.
5. Carefully
analyze the property's income and expenses for the past twelve months to
arrive at its net operating income potential.
6. Work out the
property's capitalization rate by dividing its potential operating income
by the estimated value that you derived from analyzing recent sales of
comparable properties earlier.
7. Arrive at a
rough estimate the property's value by multiplying its net operating
income by the capitalization rate you came up with for the
property.
8. Work out the cost of replacing the
improvements on the property using similar building materials and method
of construction.
How does the Replacement Cost Method
work?
The replacement cost method of estimating a
property?s value is based on the cost of repairing any aspect about the
property premises or else replacing or even making improvements on the
property reduced from the cost of the land, in order to estimate a
property?s value. Replacement costs are calculated on a per square foot
basis by dividing the total number of square feet in the building by the
prevalent per square foot construction cost using comparable materials.
For instance, a two thousand square foot convenience store that cost
$375,000 to build would have a replacement cost of $187.50 per square
foot, which is $375,000 divided by 2000.
Free Building Replacement Cost
Estimates
It is possible to get a free building
replacement cost estimate by calling a local independent insurance broker
who represents insurers who specialize in providing property and casualty
insurance coverage for residential as well as commercial buildings. While
calling a broker, all you need to do is tell them that you want a
replacement cost quote. Property replacement costs are calculated by using
a replacement cost formula that is based on the real estate property?s
geographical location along with its:
1. Complete address
2. How old the construction is
3. Type of construction used
4. Number of stories present
5. Type of roof present
6. Current utilization of
premises
7. Heating and cooling systems and their
condition
8. Square footage of the
premises
