3 Sure-Fire Ways To Determine The Value Of Real Estate

Posted on: April 9, 2011

Categories: Commercial Building, Residential House

Author: lbuen

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Image by Horia Varlan via Flickr

Understand How Investment Property Values are Determined

Just because a promising property measures up to your investing goals does not mean it could not blow up and ruin your investment portfolio. Do not jump the gun by investing in a property which you may have inspected but without verifying its real market value. You must tread the volatile real estate markets in tiptoes as properties there could become financial landmines. You cannot simply buy the seller’s or the country tax rolls figures; you have to do your own assessment. How do you exactly do this? You can determine a property’s worth in three ways depending on the kind of investing you are involved in.

Computing Value of Property in 3 Ways:

Comparable Market Approach

This method is commonly used in computing for the value of single-family or multi-family properties with less than five units. You do this by finding properties have just been sold and are similar to the property you are eyeing. These must be within the area where your prospective property is located. Similar here means approximately the same floor area, lot area, number of bedrooms, features, and so on. They do not have to be exactly the same. If a comparable property has a certain feature, such as, a garage or an extra bathroom, you may adjust your computation by adding or subtracting the cost of putting up such features which me be absent from the other property. Differences in floor and lot areas may also be balanced out by dividing the selling price by the floor area (e.g. square feet) to give you the cost per square foot. You can obtain these figures with the help of an experienced appraiser. You may also do the job yourself by collecting the necessary information from your courthouse, or with the help of a real estate broker. You can also make rough calculations using online data. Keep in mind to use comparable properties that have just recently been sold since the real estate market tend to be volatile.

Replacement Cost Method

You can also establish the value of the property by estimating the cost of reproducing the same property in the same location. When computing for this cost, you have to know the costs of construction materials and supplies. If you are not so familiar with these, you may also call a local contractor and ask for a quotation if they are to build the same building in the same location. Remember to include depreciation in the computation vis a vis the condition of the property in question. Besides the building itself, you also need to work out the average price per square foot of lots in the same area and multiply it with the lot area of the property you are assessing to give you the estimated cost of the lot. Add this with the cost of the building and you got yourself an estimate of the value of the property that you would like to invest in.

Income Approach

This approach is guided by the assumption that the value of a property is determined by the net benefits that it can bring within its remaining economic years. This makes it apt for the computing the value of commercial properties or residential properties which have over five units. Just like computing for the income of any business, this method entails subtracting operating expenses from the gross income that could be generated from the property. Expenses include annual mortgage payments, repairs and maintenance costs, taxes, marketing, legal expenses, and so on. Multiply the difference by a factor of ten to give you the approximate value of the property. You can raise its value by increasing income or bringing down operating expenses or both.

Using these more reliable methods of estimation of the value real estate, you can bid a sensible and precise offer, avoid the danger of investing in an overpriced property that could blow up your portfolio, and make a killing in your investment.

 3 Sure Fire Ways To Determine The Value Of Real Estate
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