Understanding Real Estate Value
Real estate investment is a highly competitive business and it is essential to be able to effectively identify and appraise the true worth of a piece of property prior to making any type of transaction. However, determining the true value can be a complex process that many real estate investors are unfamiliar with. Property valuation is generally performed through two basic methodologyologies: absolute valuation and relative value. The latter is the method used for all other types of real estate, including residential, commercial, industrial and agricultural properties.
Absolute valuation simply refers to determining the market value of a piece of real property by comparing current market values. Absolute value valuation for commercial and industrial properties typically utilizes an arithmetic formula. Using an arithmetic formula will make it easy to determine a percentage value for a piece of commercial or industrial real estate. The value of a piece of real property will be determined in two different ways: either by purchasing the property for its fair market value, and then determining the net present discounted value (NPV), or by selling the property at its current fair market value, and then deducting expenses related to its acquisition, which include mortgage payment, taxes, expenses associated with title research and repairs, as well as any other costs. The difference between the net present discounted value and the actual fair market value of a piece of real estate is its estimated value based on the process described above. An additional factor that can be used to determine the value of a piece of real property is the percentage of the total purchase price that is made up of mortgage payments, which can be used to estimate mortgage payments by multiplying the mortgage payment percentage by the number of mortgage payments in a given period.
In determining the net present discounted value of a piece of real estate, several factors must be considered, including market conditions, demand and supply of the piece of real estate, and the value of other properties that might be purchased to provide a buffer against fluctuations in the property’s sale price. The most important factor that must be taken into consideration is market conditions. During economic recessions and depressions, real estate values are affected significantly by this simple reason. In times when the economy experiences a period of economic depression or decline, the availability of real estate tends to drop. Therefore, it is necessary to consider the time period in which a piece of real estate has been valued, in order to properly determine the value of the piece of real estate. The most common method used to determine market conditions is real estate price movement charts.
The second technique used for determining the value of real estate involves the use of various methods that are used in determining the value of other properties. One such method is a price comparison of properties, which compares the sale price of a property to a comparable property in the same neighborhood in terms of both location and size. The third method used to determine the value of real property is the Uniform Residential Code (URC), which analyzes the size, shape, and construction type of a property in relation to comparable properties in the area in question.
It is also helpful to consider the level of maintenance required to maintain a piece of real property over a period of time. If a piece of real estate requires minimal maintenance over a long period of time, the cost of maintaining the property may not be of much significance to investors in that particular piece of real estate. However, it may play a role in determining the value of a piece of real estate that requires extensive maintenance.
A fourth consideration to determine the value of real property is related to how much depreciation is needed to maintain the property. The greater the amount of depreciation, the less the value of the real property is in comparison to a comparable piece of real property in the same area. If the piece of real estate was constructed in a high quality, well planned construction, then its value is likely to be much higher than a piece of real estate that has been poorly planned and constructed.
Real estate appraisal methods can be used to help determine the value of real estate. There are many companies that offer such services in many parts of the United States. The URC method is one of the most commonly used methods of determining the value of a piece of real property. The URC method is based on the principles of demand and supply and the ability to generate an income from a piece of real property.
There are many reasons why real estate values are determined in such a manner. For example, if there is a need to determine the value of real property to protect investment in real estate, then it is necessary to determine the value of real property to determine a buyer’s willingness to purchase a piece of real property. In addition, the ability to determine the value of real property to determine a seller’s willingness to sell their piece of real property, also known as resale value, can be necessary when selling real property for a profit. As with all investment decisions, one must take into account the financial and risk factor when using these techniques for determining the value of real property.