Basics of Real Estate Valuation Every Investors Should Know

Real estate investors do not always have it easy. Determining how much money (and why) one should pay for a property is one of the most complex issues. There’s no way of skirting around this question. This is especially if you want to be able to make profitable offers and predict your earnings from future investments.

Luckily, you can answer the toughest questions as long as you’re willing to dedicate some time and effort toward your research. To give you a head start, this article goes over the basics of real estate valuation. It will also explain the three common methods investors use.

In real estate, there are really no two properties that are exactly the same. I some cases, even the seemingly smallest details can cause the prices to differ.

Continue reading this article to learn about the basics of real estate valuation so you can grasp what influences the price of a property and what methods you can use to run your own appraisal.

What Exactly is Real Estate Valuation?

Real estate valuation, or real estate appraisal, is a process to determine the economic value of a particular investment. It’s particularly helpful for those investors who are seeking a way to pinpoint a fair market value of a property or a price that both a seller and buyer can agree on. 

In a nutshell, both parties involved in the process of selling and buying a property can use an appropriate valuation method that won’t put anyone at a disadvantage. It can be useful in the practice of wholesaling, which you can learn more about if you check here. 

Criteria that can determine a value of a house include, among others:

• location,
• community amenities,
• size and usable space,
• age and condition,
• supply and demand, 
• economic outlook,
• investment potential.

Nevertheless, it’s essential to remember that a property’s estimated value doesn’t always correspond to its price. For instance, in some cases, the seller might be in a hurry to sell the property. Reasons for this could be distress or other personal reasons. The property may also perform poorly during the open house viewing, or the owner might need to sell due to financial hardships or negative equity.

Why is Real Estate Valuation so Important?

When you want to make money with real estate investments, you simply need to know the values of the properties you have an eye on. Not only is it an excellent way to ensure that you won’t overpay, but it can also help you determine which renovations may be necessary to get the most out of a particular investment. It’s also helpful if you want to get adequate insurance coverage in case something happens to it unexpectedly. Some of these events could be a sudden fire or a natural disaster. 

Property valuation also determines the amount of property taxes that you will need to pay as the investor. If you want to finance your investment with the help of a loan, it’s vital to remember one key tip. This tip is that the majority of mortgage lenders will require an appraisal before deciding to lend you money. It’s the bank’s way of protecting themselves from providing funds for a property that might end up not being worth the money.

What are the Most Common Property Valuation Methods?

There are many property valuation methods. Below, we will detail the three most commonly used methods for real estate valuation. These methods can be incredibly helpful for investors trying to determine a property’s value. 

Here are the basics to know:

Sales Comparison Approach

The sales comparison approach is popular to use when there’s a need to estimate the value of single-family homes. This approach is also popular for valuing land. This method involves quite a straightforward process. All you need to really do is compare a particular property in question to similar properties in the area that have been recently sold. 

To allow for the comparison, the properties must share certain similarities. These similarities can include square footage, number of rooms, or the age of the building. However, these factors can vary depending on the case. Often, some adjustments are necessary. If this is true, the real estate appraisers have to know exactly how to value the differences between the properties they’re comparing.

Cost Approach

Another real estate valuation approach is the cost approach. This approach is considered to be the most accurate when used to appraise new homes. It estimates how much a potential buyer would need to pay for the land. It also takes into consideration the cost of constructing a similar building from scratch. When using this method, it’s crucial to ask a couple questions. One in particular is if the property in question were to be destroyed for whatever reason, how much would it cost today to rebuild it? 

Income Capitalization Approach

Last but not least, it’s also important to mention the income capitalization approach. This approach is used to determine the value of properties whose values can be derived based on the amount of income they can generate. Such buildings may include apartment buildings, office or retail space.

If you want to learn the formula used for calculations in this real estate valuation approach and see some examples, don’t hesitate to check out this article that explains it in detail.

Real Estate Valuation Details to Know – Summary

As you can see, the valuation of a property is often a complex process involving many different factors. Each of these factors must be considered carefully. It is also incredibly useful and important for any real estate investor that aims for success.

Out of the three most commonly used property valuation methods, the sales comparison approach tends to work best when appraising single-family homes and pieces of land. The cost approach, though, may also help, while the income capitalization approach helps when there’s a need to value properties that are intended to generate income.