Real Estate Valuation By Veristrat Inc

SAN FRANCISCO - Jan. 3, 2018 - PRLog -- The focus is to determine market value, the most probable sales price a typical investor is willing to pay.

Valuations are critical for infrequently traded and unique assets such as real estate properties. Valuations can be used to evaluate the performance of real estate or to determine an estimate of price or value if a transaction is anticipated.

Valuation Approaches

Let us understand the three basic approaches to value real estate

·         Cost or Asset based approach:  a buyer would not pay more for a property than it would cost to purchase land and construct a comparable building. Value is derived by adding the current market value of vacant land to the current replacement/ reproduction cost of a new building and adjusting for depreciation and obsolescence. The depreciation includes physical deterioration, functional obsolescence, locational obsolescence and economic obsolescence. The concept of highest and best is important in determining value of vacant site

Ø  Replacement cost:  based on current construction costs and standards and

         Should include any builder/developer's profit

Ø  Reproduction cost:  cost of reproducing an exact replica of the building using the same          building materials, architectural design and quality of construction

Ø  Replacement cost is more relevant for valuation purposes because reproduction cost    may be uneconomical

Ø  Appraisal method:  fair market value of asset is estimated by taking into account present condition of assets, including depreciation and obsolescence

Ø  Liquidation/ Salvage value:  fair value of an asset is estimated on sale, liquidation or closure

Cost approach is often used for new properties, unusual properties or properties where comparable transactions are limited.  Example schools, government buildings and hospitals.

·         Sales comparison approach:  a buyer would not pay more for a property than others are paying for similar properties. Sale price of comparable properties are adjusted for differences with the subject property.  The differences may relate to size, age, location, market conditions at the time of sale and property condition. The values of comparable properties are adjusted upward or downward for desirable or undesirable differences with the subject property

Sales comparison approach is most useful when comparable transactions are there, as is usually the case with single family homes and land.

·         Income approach:  takes into consideration income of property. It includes two valuation methods

Ø  Direct capitalization method:  value is based on capitalizing the first year net operating  income of the property using a capitalization rate

o   Gross income multiplier, a form of direct capitalization, is a ratio of the sales

         Price to the property's expected gross income in the year after purchase

Ø  Discounted cash flow method:  value is based on the present value of the property's future cash flows using a discount rate

         The income approach is most useful in commercial real estate transactions.

Veristrat engages in real estate valuation. The methods used are replacement/ reproduction cost, appraisal method and liquidation/ salvage value and provides real estate valuation for estimating fair market value, financial reporting, tax & insurance purposes and legal settlements.

Demonetization

Demonetization was announced on 8 November 2016 by Indian government by cancelling legal tender of Rs 500 and Rs 1000 denominations of banknotes. Demonetization was necessary to eliminate black money, restricting funding of terrorism with fake currency and controlling duplicating of Indian banknotes. It has adversely effected the Indian real Estate Industry and the main pointers in this regard are:

Effect of demonetization on India's real estate industry

·         Transparency in transactions will help remove unaccountable cash in the real estate industry

·         Real estate stocks performed better on the stock market

·         Increase in Foreign Direct Investment

·         Real estate transactions reduced due to cash crunch

·         The secondary sales and luxury housing segment where cash is a major component in transactions, were adversely impacted

·         Low interest rate on home loans making real estate an attractive investment

·         Housing segment became more affordable with property prices declining

Conclusion

The three valuation approaches cost, income and sales comparison are likely to yield different value estimates because of different assumptions and availability of data. Some approaches may be more applicable than others, depending on the property type and market conditions. In an active market with lot of comparable transactions, sales comparison approach is more

Also Read: Business valuation methods: https://www.veristrat.com/blog-valuation/business-valuati...

Source: https://www.veristrat.com