Estimating the value attached to real estate properties is essential for various endeavors that include sales listing, asset financing, property insurance, taxation, and investment analysis. For most people, establishing the rental rate or purchase price for a real estate property remains an essential application of property valuation. Our professional property management experts at Specialized Property Management Fort Worth can help! This post focuses on explaining the basic valuation methods and some tips for the best property valuation.

What is a property valuation?

Property valuation refers to the process in which the commercial worth of a real estate venture is established to determine the market value of the property or the price that an informed seller is willing to sell the property to a knowledgeable buyer. Simply put, the two parties involved have the relevant information about the property, and none of them are forced to buy or sell. It is imperative to note that the property value may not always be equal to its price. There are instances where the sellers may be distressed by issues that necessitate them to dispose of the property immediately at a price that may be below the prevailing market value.

Why do you need property valuation?

Property valuation is an essential factor when investing in real estate, determining how much property insurance and taxes to pay. Additionally, the financial institutions that lend mortgages require home valuation before giving out loans. They put such a requirement to shield potential buyers from paying expensively for property and protect financial institutions from financing properties that have less worth than the amount invested in the properties.
Residential property appraisals are also necessary when dealing with legal issues such as lawsuits, real estate settlements, and divorce.

How is property valuation done: The common approaches used

Certified professional appraisers do the valuation of property, but real estate investors can do the valuation of their properties all by themselves. The overall value of a property can be determined by factors such as the size and location of the property. Commercial and residential properties will also value differently. The following are three popular approaches used in property valuation.

A. The income approach

This is the property valuation approach that is mainly used in rental and commercial properties. The primary idea applied in the income approach is to compute the current value of a property depending on the income it gives, dividing it by the capitation rate. The appraiser starts by collecting the expenses and income statements for the property at hand and similar real estate properties in the neighborhood to help in estimating the net operating income. The net operating income is broken down into the following steps.

i. An estimate of the gross potential income: the overall income property is likely to be general when it has 100% occupancy.

ii. An estimate of effective gross income: this is computed by approximating the vacancy costs by looking at similar properties in the locality. The figure you obtain represents the normal loss of revenue caused by possible vacancies.

iii. Estimate property expenses: expenses come in two categories variable and fixed expenses. Fixed expenses include property mortgages and tax payments that do not change as time progresses. Variable expenses encompass the rest of the expenses like management fees and utility bills.

iv. Calculate the net operating income (NOI): it is done by deducting the estimated expenses from effective gross income. The remaining thing is to select a suitable cap rate. A property appraiser or a real estate investor can estimate the cap rate using the market sales of comparable properties sold recently.
As such, the property value will be the net operating cost divided by the cap rate.
That is Property value = NOI/CAP RATE.

B. The sales comparison approach

This uses the available market data of selling prices to approximate the value of a particular property. The valuation of the property involves a comparison of other similar properties sold recently. The comparable properties must have the same features as those in question. These features include physical characteristics of a property such as the number of rooms, square footage, and age of the building. The location of the building should not be overlooked at all costs. The appraise using this approach utilizes the relevant adjustment as there will be no properties that appear exactly the same. This method is mainly used in valuing single-family residences, where there are several comparable properties to analyze.

C. The cost approach

This property valuation approach in real estate considers the property value as the cost of land added to the cost of replacing the property(the costs of construction) less the functional and physical depreciation.
This valuation method is mainly used to value real estate properties that cannot be easily sold, such as hospitals, government buildings, and schools. You can estimate the land cost using the comparison approach by assessing the sales of recently sold land close to the property in question. The sales must be comparable in terms of location and size. The replacement costs can be estimated by establishing the cost of constructing a square foot of comparable properties and multiplying it by the square footage of the entire building.

Top Tips for Getting a Desirable Property Valuation

1. Presentation

Presentation is one of the key aspects to address when you are expecting a property valuation. Always ensure the landscapes and backyard gardens are attractive and clean all the clutter throughout the apartment. The first impressions really matter to the property appraisers. They will become more positive about a property that is excellently painted, tidy, and present well to a buyer. There is nothing as discouraging as coming for property valuation and entering a house with clothes scattered on the floor in the bedroom, unwashed dishes piled on the sink, a clogged drainage system, and dirty washrooms. The outdoor environment should also be properly maintained by mowing the lawns and trimming the edges. The exceptional painting on the property should be complete and appealing as the first impressions can be distorted by partial paintwork.

2. Evidence of recent sales

It is imperative to prepare information for the appraisers regarding the sale prices attained from any recent property sales in your area. The best time to get a perfect valuation of real estate property is to establish the sales of the two or three sales of properties sold recently in your area with similar features as the property in question.
Such recent sales have a direct impact on the value that the appraisers will arrive at on your property. Attend the nearby auctions to keep tables of sales that occur in your area. Get a sales brochure from the auctioneers so that you may give your valuers. Such brochures contain useful information that will help the appraisers to get in touch with the auctioneers to confirm the prices of the properties sold. Some property owners may go further and gather information on sales of comparable properties within a 500 meters radius over the months.

3. A rate notice

Some appraisers request to see a copy of the municipal council rates in your area. These rates vary from one region to the other, but there is an unimproved land value or site value that reflects the land value only. An improved value may be available in some instances, depending on the land and building on site. These values are mainly used for statistical analysis but can give the valuers an idea of where the property value is in the marketplace.

4. Remain honest

It is essential to give the appraiser truthful information about the comparable properties in the area. The figure you give on the recent sales must be accurate and show the genuine value of the recently sold homes. The valuers may develop a defensive mindset when they realize that you were giving them the wrong figure. Remember, they have the skills and capacity to establish the accuracy of the figures that you state.

5. Complete the improvements early enough

Ensure you complete any essential improvements needed before the property valuers arrive. Do not fall into the trap of postponing any repairs, as those may compromise the property value. The appraiser will just value the property just as they find it on the day of the valuation. They will not take into account property improvement plans that you may have future.

6. Clear instructions

It is prudent to communicate with the valuers and let them know if you have plans for future repairs, and if you have quotations and costing for the same. In case you are going to a lender and the lender requests a valuation, that is “as if complete,” let the appraisers know this too. The valuers may value the property as it is on the valuation day if you have not communicated such information to them.

7. Identify recent improvements.

Give the valuers a detailed list of all the recent improvements that may have been made to the property. The list should include details such as the type of repair work done and their respective costs. It will be prudent to include the contract details and specifications of the project to give the appraiser a clear picture of what was spent on the improvements. Providing such details will increase weight in your valuation application, but the cost incurred may not be equal to the value always.

8. Avoid overcapitalizing

Improvements and restoration add value to a property, but you should be careful not to overcapitalize on them. It will be prudent to avoid spending excessively on a particular improvement that a particular area can handle. For instance, installing a large extension in a property for improvement will increase the property value. Unfortunately, the selling price may not go beyond the prevailing market costs for the properties in that area.

9. Be keen on Outdoor living areas.

The presence of an outdoor living space adds value to a property. You should, therefore, keep such areas appealing and presentable. A functional outdoor living area has a good impact on the valuation of the property greatly.

10. Bathroom and kitchen

There are essential facilities in any property that must be kept in pristine conditions at all times. If these facilities are presentable and tidy with no dilapidated looks, they will increase the property value.

11. Etiquette
    Prudent valuers take the shortest time to inspect in and outside aspects of the properties. Thus, it will be imperative to avoid feeling that you have to speak to the valuers every time to make sure they do not miss important details. Some property owners feel that they have to follow the valuer every step, pointing out each feature in an apartment that they feel is valuable. Such an act may not go well with professional appraisers who know what to do to come up with a perfect property value.
    
12. Exercise patience

Avoid asking the valuation experts what they think your property is worth just before they leave. They need time to compile their inspection report and come up with the best value based on the report. The valuers need to leave and use more than one method to determine the value of your property. They may use a direct comparison method where they compare the sales of similar properties to arrive at the value. Alternatively, appraisers may use the summation method where they examine the value of land and include the added value, such as improvements on the land such as buildings. The added value at a time depends on the evidence of the market or analyzed on the value per square meter technique.