The Development Property Valuation calculator is suitable for accurately analysing development opportunities and projects. The Financial analysis makes use of XIRR and XNPV which is the date sensitive equivalent of IRR and MIRR. These formulae…
Generally, a property valuation is conducted when you’re looking to buy or sell a property. Property valuation can also be considered as real estate appraisal or land valuation. Basically, it is the process of determining the value of the real estate property to arrive at an acceptable price. The location and condition of the property are usually the key factors in valuing a property. Hence, if both factors are good, then the resulting value will be affected too and most likely lean on better valuation.
There are several types of value that are commonly used for real estate appraising such as:
- Market Value – value perceived by the open market
- Liquidation Value – usually when a business goes bankrupt or undergoing liquidation and is often lower than the fair market value
- Value-in-Use – value perceived by one particular user
- Investment Value – value perceived by an investor
- Insurable Value – value covered by an insurance policy but excluding the site value
Each real estate property is unique and the market changes day by day thus, it is not that easy to determine the price of a property. Usually, an appraiser is hired to conduct a real estate property valuation to asses a property’s worth. Otherwise, creating real estate valuation models will also work as long as you have the proper tools and substantial economic know-how. Of course, there are guidelines that are expected to be followed in real estate appraising such as taking account the property’s features, structure, condition, quality, location, as well as planning restrictions. The appraiser, thus, compares to other similar properties and market conditions to finally come up with a valuation for the property. But this doesn’t mean that the price will be the same as the resulting value from the real estate property valuation since it all depends on the agreement of the involved parties.
Approaches to Value
There are three basic approaches to determining the value of a property. These are what we know as the Income Approach, Market Approach, and Cost Approach. The method used to valuation depends on the data that’s available as well as the circumstances of the property.
Income Approach is one of the valuation methodologies which determines the value by considering the potential profitability of the property. This approach is usually applied to commercial and investment properties which are income-producing properties. The most used valuation method that best applies the income approach is the Discounted Cash Flow (DCF) Valuation. It’s a method used to determine the value by considering the forecasted cash flows which are then discounted to the present value of the property.
The market approach is the next valuation approach that determines the value of a property by taking into account the value of comparable properties or historical transactions. This approach is beneficial when capturing the market sentiment while considering the peers, thus, it determines if there’s a relevance between the economic value and the potential selling price of the property. Thus, it is quite popular among appraisers. The valuation method that applies the market approach is the Relative Valuation Comparisons. It is the method to determine the value of a property by conducting a market analysis regarding the pricing of similar properties.
When conducting a valuation using the market approach there are certain basic steps that one needs to go through.
- Research the market to gather data regarding the sales of comparable properties. In other words, conduct a market analysis.
- Investigate the accuracy and reliability of the data gathered.
- Determine the relevant factors for comparison to create a comparative analysis for each.
- Start comparing the property to be sold or purchased with the sale of comparable properties while considering the factors that will bring changes to the resulting value, thus, adjust as needed.
- Find balance in regards to multiple resulting values from the adjustment. In the end, the property should be priced in the same range compared to the market in order for the pricing to make sense.
Here are the relevant factors for comparison to develop a comparative analysis:
- Price per sqm – value is determined by comparing the price per measurement of area/space (applies for commercial buildings but also for residential apartments)
- Price per room – value is determined by comparing the prices of rooms (applies best for residential apartments)
- Land prices – value is determined by considering the land prices paid in that area
- Rental rates – comparing the rental rates in that area with similar type of buildings (e.g. retail, office, production space, etc.)
- Calculation of the implied Gross Yield and Net Yields
- Gross yield is everything before expenses. To calculate the implied gross yield for the analysis, the following formula is used: Price / Gross rent of comparable buildings
- Net yield is when after you take into account the running expenses. To calculate the net yield for the analysis, the following formula is used: Price / Estimated Net Operating Income of the comparable buildings
To calculate how much rent you can achieve for a property depends on certain factors such as the type of property being offered, location and condition of the property, state of the rental market, and the supply and demand in the area. After considering these factors, you need to do a thorough look of your calculations to ensure that you didn’t make any mistake with the rental percentage then also get a clear understanding of all the expenses that will be incurred in the process such as mortgage repayments, maintenance costs, repairs, fees for caretakers, furnishings, insurance, etc.
Cost Approach is the third classic approach to valuation that determines the value of the property by ensuring that the price would not exceed the cost to build an equivalent property. This approach is most appropriate for property appraising and for conducting a real estate property valuation. It is also considered as the easiest way to determine the value of a property since it refers to the data in the balance sheet and focuses on finding the value of cost to be expended rather than determining the total value of the property’s feasibility. The valuation methods that best apply the cost approach are the following:
- Replacement Cost – a method to determine the value of a property by considering the cost expended when replacing or reconstructing the property, thus, the replacement cost tend to be higher than the book value of the property since depreciation will not be accounted.
- Net Asset Value – in this method, the value is determined by calculating the net asset value of the property after taking into account the adequate depreciation of its age.
Each valuation method has its own advantages and disadvantages, but basically, each has its own focus which results in one goal, determining the value of a property. To ensure that you will get the best out of selling or purchasing properties, then you need to conduct real estate valuation by creating real estate valuation models. With real estate financial models, the whole process of valuation will be easier and a lot smoother. Since the real estate financial models are in a spreadsheet form, showing the numerical equivalent of the property, it will be easier for the users involved to arrive with a sound economic decision.
Real estate Financial Model Templates
If you’re looking to sell or purchase a property, make sure to properly research once you conduct your valuation. It is, after all, more beneficial to get the most out of the transaction and who would really say no to earning more or saving up some money? Especially nowadays when money runs the world, it is always best to have alternatives for extra income which will eventually be helpful for you and your family in the future. So, it is undeniable that the task of valuation is very critical when you’re planning to sell or buy a property. But of course, conducting a valuation will require you to have a substantial understanding of the market, thus, the need to research and help from an appraiser is also equally important.
As mentioned way above, another solution which can help you conduct a real estate valuation is to take advantage of ready-made real estate financial model templates. Creating real estate financial models can be complex, so without proper know-how and experience in financial modeling, the task will tend to take a long time to finish and might even contain mistakes. Therefore, by acquiring real estate financial model templates, the task will be a lot easier since all you have to do is to input the needed numerical data and customize the model according to your requirements. No more spending too much time and money for your property valuation, as long as you use the proper tools for creating real estate financial models.