Everything you should know when valuing a real estate asset

Actualizado: abr 26

When the need arises to value a real estate asset either because you are going to buy your first residence or because you have some capital and you want to undertake the adventure of being a real estate developer, you must first understand how the real estate assets should be valued and which method to use depending on the case and the market conditions where you intend to invest. The different methods that you can use depending on the case are the following: 1. Market value: Market value is the most probable price in terms of money that a property will It expects to produce in a competitive and open market under all the conditions necessary for a fair sale, in which both the buyer and the seller act prudently, with knowledge and assuming that the price is not affected by an undue stimulus. Implicit in this definition is the completion of the sale on a specific date and the transfer of title from seller to buyer under the following conditions: · Buyer and seller are typically motivated. · Both parties are well informed or advised, and act according to what consider as your best interests. · A reasonable time of exposure in the market precedes the sale. · Payment is made in acceptable currency or in a financial arrangement in terms · Comparables. · The price represents the normal consideration for the property to be sold and not to be affected by an unconventional financing structure or concessions granted by any of the parties associated with the sale (Appraisal Standards Board of the Appraisal Foundation, 1997) 2. Greater and better use: Greater and Better Use, refers to the most probable and reasonable use that supports its most high present value. The greatest and best use, or most probable use, must be legally permissible, physically possible, economically viable and must obtain maximum productivity (The Appraisal of Real Estate, 2011). The concept of greater and better use is based on traditional valuation theory and reflects the attitudes of typical buyers and sellers who recognize that value is conceived according to future benefits. This theory is based on the owner's wealth maximization, with considerations given for the community's objectives. A use that does not meet the needs of the public will not meet the aforementioned criteria of greater and better use (Colliers, 2013) 3. Real estate valuation methods: The real estate appraisal has the purpose of obtaining a market value or price for which a property could be sold in a market of free supply and demand. The approaches with which such an estimate is made are four: comparison, residual, cost and income. The main philosophies of each of the methods are presented below. 4. Comparative market approach: Before defining this method, it is important to be clear about the following concepts: Comparable Assets are properties that are considered similar to the property subject to valuation or suitable to carry out the homogenization, taking into account its location, use, typology, surface, age, state of conservation, or other relevant physical characteristics. Homogenization of comparable property prices, procedure by which They analyze the characteristics of the property to be valued in relation to other comparables, in order to deduce, by comparison between its similarities or differences, a purchase price or a homogenized income for it (González, Pere & Villaronga, 2006). After being clear about these concepts, the objective of the market comparables method is valuing the price of a good by comparing it with other similar goods for which the price is known for having been the subject of recent transactions. In order to use this method, it is necessary to have a comparable property real estate market and to have access to information on supply and demand prices (Aznar et al, 2012). The Comparative Market Approach is based on the substitution principle, which establishes that the cost of acquiring an equally desirable property, in the same market area. The characteristics of the operations identified are compared to that of the property under study under conditions of location, size, quality, expenses incurred in the purchase, market conditions on the date of sale, physical characteristics, economic situation of the investor, etc., with the aim of defining a range of values ​​based on a unit of value to be compared. In active markets with sufficient applicable comparables, this approach is an adequate measurement of value that best reflects market behavior. Alternatively, this approach may offer limited reliability because many properties have unique characteristics that be accounted for in the adjustment process (Colliers, 2013). 5. Residual focus: It is the method that seeks to establish the commercial value of the property, normally for the land, from estimating the total amount of sales of a construction project, in accordance with current urban regulations and in accordance with the market for the final salable good, on the land subject to assessment. To find the land value, all direct and indirect costs as well as the expected profit of the investor / developer are deducted from an estimate of the projected gross sales of the completed units, net sales are discounted at present value using a rate derived from market for development time and absorption period, indicating the value of the gross land area. It is essential that in addition to the technical and legal feasibility the commercial feasibility of the project is evaluated, that is, the real possibility of selling the projected. This method (technique) must be developed under the principle of greater and better use, according to the which the value of a property capable of being dedicated to different uses will be the one that results from allocating it, within the legal and physical possibilities, to the most economically profitable, or if it is capable of being built with different building intensities, will be the one that results from build it, within legal and physical possibilities, with the combination of intensities that allow obtaining the highest profitability, according to market conditions. (Agustín Codazzi Geographical Institute, 2008). The residual technique is useful in real estate valuation that has an opportunity for development, as a result of additional investment in reconstruction, expansion, modernization, etc., and to which there can be a return of capital and profits (Skarzyński, 2006). 6. Focus of cost or replacement: The valuation by this method is based on the substitution principle, which indicates that the value of a property must not be greater than the amount necessary to develop a property with the same characteristics and utility. It is carried out by identifying the new replacement value of the buildings and the market value of the land and discounting the effects of depreciation due to age, conservation and obsolescence. In developing this method, the total construction cost must be understood as the sum of the direct, indirect, financial, and project management costs that must be incurred to carry out the work. After calculating the volumes and units required for construction, special attention must be paid to the costs of the site where the property is located. Depreciation must be applied to the value defined as total cost. From the replacement cost to new, a monetary amount associated with depreciation can be deducted. There are three types of depreciation: physical, functional and economic. Physical depreciation is the result of the use and deterioration of buildings. Functional obsolescence is the result of design or physical problems which reduce the ability to generate income or the desire to occupy the property under study. Economic obsolescence is the result of external influences (economic or neighborhood) which decrease the value of the property. This method should be used in the event that the appraised asset does not have assets comparable due to its nature (schools, hospitals, stadiums, etc.) or the lack of market data (offers or transactions) and corresponds to a property not subject to the horizontal property regime (Instituto Geográfico Agustín Codazzi, 2008). 7. Income approach: It is the valuation technique that seeks to establish the commercial value of a good, based on the rents or income that can be obtained from the same good, or similar and comparable properties due to their physical characteristics, use and location, bringing to present value the sum of the probable income or rents generated in the remaining life of the appraised asset, with a capitalization or interest rate. Remaining life is understood as the difference between the useful life of the property and the age that the property actually possesses (Instituto Geográfico Agustín Codazzi, 2008). The Income Approach is based on the premise that properties are acquired for their rental income generation potential, considering both the annual return produced by invested capital and the return on capital. This valuation technique pays special attention to current contractual rents, projected market rents, and other sources of income, vacancy reserves, and projected expenses associated with efficient property operation and management. The relationship of these estimates of income to the value of the property can be made both as a single value and with a series of flows pr

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