One of the first questions buyers pose to real estate professional is "what is my property worth". That can be a tricky question to answer. For starters, the agent or broker does not want to give a value that is too high for fear of creating unreasonable expectations which will lead to ultimate failure. On the other side of the coin, they don't want to value the property too low and either insult their potential client or, even worse, adversely affect their commission. In this blog entry, I will deal with the value of residential property.
I would like to say that placing a value on a home is as simple as comparing it to the houses nearby with similar features that have sold recently. In reality, that calculation plays the biggest part in determining the bank's appraisal of the home, but it does not encompass all that goes into placing the asking price or the offering price on a home. Unfortunately for someone like me who likes his assessments to be objective and based on concrete items (incomes, expenses, etc.), there are far more subjective factors influencing homes. Among these factors are perceived affluence of the neighborhood, proximity to schools and the ratings of those schools, crime rates, neighbors, and the list goes on and on.
To start the valuation, you want to use the concrete factors. If it is a new home (e.g. you are a builder), start with the overall cost of construction and add your profit margin. If it is an existing home that the new has worn off of, you need to examine comparable properties and make adjustments based on what your home has or does not have in comparison to those comparable homes. If you are doing this on your own, use the internet to your advantage, but make sure you are getting comparables. A 1500 square foot Cape Cod in Owenton, KY does not equal an identical 1500 square foot Cape Cod in Savannah, GA. You can also use your local PVA's office to your advantage to find out what features comparable homes possess and what type of value the PVA has placed on those homes.
Once you have your concrete numbers in place, you can then start to apply the subjective factors. Look at it through the eyes of a buyer and decide how much each factor either adds to the property or takes away from it. For example: You are 1/2 mile to the best school in the district so you might decide to add $2000; however, your crime rate is double that of any other neighborhood in the same area so you deduct $5000. You can see where I am going with this valuation. You have to decide what each one of the factors brings to the table and how much it affects demand for your property.
The art of valuing homes is not an exact science. It takes a great deal of research and thought. As with all property transactions, I highly suggest employing the services of a real estate professional. Many buyers overlook the benefits of retaining a real estate agent/broker to assist them in finding and purchasing properties. If you are looking to buy, the services of the agent/broker will usually be at no cost to the buyer. If you are the seller, the value of the the experience and insight that your agent/broker brings to the table will, in many cases, far outweigh any costs associated with those services.
Monday, November 17, 2008
Property Values - Commercial
One of the first questions buyers pose to real estate professional is "what is my property worth". That can be a tricky question to answer. For starters, the agent or broker does not want to give a value that is too high for fear of creating unreasonable expectations which will lead to ultimate failure. On the other side of the coin, they don't want to value the property too low and either insult their potential client or, even worse, adversely affect their commission. In this blog entry, I will deal with the value of commercial/income producing property.
I deal mostly with commercial transactions. Commercial property, unlike residential property, is simply a math problem. The value of commercial property is always some function of the profitability. The most common reflection of one of these functions is known as the Cap Rate. That is short for Capitalization Rate and is calculated by dividing the Net Operating Income of a property by its Fair Market Value. For example, if a property has an NOI of $60,000 and a FMV of $750,0o0, then its Cap Rate is 8% ( 60,000 divided by 750,000 is 0.08 or 8%). In short, the Cap Rate is the amount of return on investment that a property investor would expect to get from his investment in a piece of property.
Each market segment has different factors affecting the cap rate. Cap Rates move up and down with the market and are reflective of the risk/reward of the investment. Assuming all other factors are equal, lower risk investments will have a lower cap rate and thus a higher value. Likewise, higher risk investments will have higher cap rates and lower values.
To determine the actual value of a piece of property, you have to get into some research. As is the case with any valuation, you must find comparable properties (don't compare a gas station with an Applebees or vice versa) that are being offered for sale or, better yet, have already sold. Examine the basic numbers and determine what the cap rate for the properties is. If your research is anything like mine, you will find that properties of specific market segments tend to run along the same cap rates with a few exceptions thrown in (there will always be one way higher and then again some way lower). You can throw out the odd properties, but take time to evaluate why they might be different. When you get down to a obvious range, then you can start dissecting why one property has a higher or lower rate within the range. From that determination, you can then apply the findings to your property and come up with a highly educated assessment of the value.
As with all property transactions, I highly suggest employing the services of a real estate professional. Many buyers overlook the benefits of retaining a real estate agent/broker to assist them in finding and purchasing properties. If you are looking to buy, the services of the agent/broker will usually be at no cost to the buyer. If you are the seller, the value of the the experience and insight that your agent/broker brings to the table will, in many cases, far outweigh any costs associated with those services.
I deal mostly with commercial transactions. Commercial property, unlike residential property, is simply a math problem. The value of commercial property is always some function of the profitability. The most common reflection of one of these functions is known as the Cap Rate. That is short for Capitalization Rate and is calculated by dividing the Net Operating Income of a property by its Fair Market Value. For example, if a property has an NOI of $60,000 and a FMV of $750,0o0, then its Cap Rate is 8% ( 60,000 divided by 750,000 is 0.08 or 8%). In short, the Cap Rate is the amount of return on investment that a property investor would expect to get from his investment in a piece of property.
Each market segment has different factors affecting the cap rate. Cap Rates move up and down with the market and are reflective of the risk/reward of the investment. Assuming all other factors are equal, lower risk investments will have a lower cap rate and thus a higher value. Likewise, higher risk investments will have higher cap rates and lower values.
To determine the actual value of a piece of property, you have to get into some research. As is the case with any valuation, you must find comparable properties (don't compare a gas station with an Applebees or vice versa) that are being offered for sale or, better yet, have already sold. Examine the basic numbers and determine what the cap rate for the properties is. If your research is anything like mine, you will find that properties of specific market segments tend to run along the same cap rates with a few exceptions thrown in (there will always be one way higher and then again some way lower). You can throw out the odd properties, but take time to evaluate why they might be different. When you get down to a obvious range, then you can start dissecting why one property has a higher or lower rate within the range. From that determination, you can then apply the findings to your property and come up with a highly educated assessment of the value.
As with all property transactions, I highly suggest employing the services of a real estate professional. Many buyers overlook the benefits of retaining a real estate agent/broker to assist them in finding and purchasing properties. If you are looking to buy, the services of the agent/broker will usually be at no cost to the buyer. If you are the seller, the value of the the experience and insight that your agent/broker brings to the table will, in many cases, far outweigh any costs associated with those services.
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