How to Evaluate Real Estate Property

A lot of novice Triangle real estate investors waste time in running the numbers when evaluating real estate properties. Some people perform laborious calculations all day long and still not come up with real value of the real estate property. The problem is that most newbie investors make the mistakes of focusing too much on math without knowing the correct way to evaluate real estate property.

Current low prices of real estate properties have been alluring investors into the market. If you are also one of those investors hoping to make it big in the real estate investment, you should continue reading as here I will reveal to you under-the-wrap secrets about the effective ways to evaluate real estate property. Knowing the correct way to evaluate real estate properties will make the difference between finding yourself in a bankruptcy court and becoming the next Donald Trump.

Methods to Evaluate Real Estate Property

Accurate assessment of market value is essential when investing in the real estate market. There are 5 basic methods of appraising the real estate property. The appraisal methods differ in the approaches but have one common goal – to find the true value of the real estate property.

1. Income Approach

Income approach is an effective method to evaluate and determine value of the real estate property. Through this method, you capitalize your required rate of return by the net operating income (NOI) produced by the property. Using this method, you can correctly assess the real market value of the property based on its income stream and your required ROI.

For example, let’s say that the return you desire from your cash investment is 9%. You estimate that the net operating income (NOI) of the real estate property to be around $50,000. Therefore, the value of the real estate property using the income approach is $588,235 ($38,500 / 8.5%). You should be willing to pay this amount for the property that is based on your required ROI and net income stream of the property.

2. Cost Approach

The cost approach method estimates value of the real estate property by determining the cost to replace the entire real estate property. In other words, the cost approach method assesses what it would cost to purchase the land and build an identical property. The first step is to find out the land value. Secondly, you must determine the cost of installing landscape elements like lawns, shrubs, trees etc. Finally, you must compare what would be the cost building the real estate property of identical size and design.

Suppose that the subject property stands on the land that is valued at $8 per square foot. In case the property is standing on a land of 15,000 feet, the land is worth $120,000. Next, you assess that the landscape elements can be replaced at the cost of $20,000. Finally, you determine that the cost of replacing the real estate property is $100,000. So, the value of the real estate property using the cost approach comes to around $240, 000 ($120,000 + $20,000 + $100,000).

3. Assessed Value Approach

The assessed value method is another way to evaluate the real estate property. The assessed value is the value placed on the property by the town or city’s tax assessor for tax purposes. A team of qualified assessors fix the properties after a detailed analysis of the property and interviewing the property owners. Tax assessors’ assess the whole town during a period of four to twelve periods. The properties are re-assessed once the city council deems that the value has become outdated and require reassessment.

The problem with this approach is that the assessed value varies dramatically from one area to another. Also, each tax assessor office has its own unique approach of valuing the property within the jurisdiction. Sometimes the information is outdated and does not reflect the correct value of the real estate property. The approach is only helpful if you want a quick overview of the property value for making comparison. For accurate and detailed assessment of the property, you should use other property valuation methods.

4. Previous Sale Price Approach

Another quick method to determine the real estate property is the last sale price of the house. This is the price of the property that was paid by the current owner of the property.

However, you should not rely on this method if the transaction occurred too far in the past. In such cases, the sales prices of the property may not reflect its current value.

5. Market Data Approach

The market data evaluation method compares a list of properties that are identical to the subject property. The approach is also known as the “Comparable Sales” approach. Licensed professionals and real estate appraisers use this approach for evaluating real estate properties.

When determining property value using the market data approach, you should look to appraise identical houses in the same neighbourhood that have been sold recently. In other words, the unit property value is determined by comparing the subject property with those that are sold recently and located in similar areas with almost the same amenities, sizes, rent structures and appearances.

A simple example will help you understand how to determine market value using the market data approach. Suppose you create a list of seven comparable condominiums that are located in the local area and sold for an average of $70,000 per unit. You arrive at market value of the property by multiplying the $70,000 average unit price with the number of units in the subject property. So, if there are eight units then the market value of the condominiums using the market data approach comes to around $56,000.

Another variant of the market data approach is to determine the real estate property value through assessing the range within which identical real estate properties have been sold in the neighbourhood. Suppose that five identical properties exist in the area that have been sold recently for $75,000, $60,000, $69,000, $65,000, and $71,000. Then, the value of the subject real estate property would lie in the range of $60,000 and $75,000. You can set listing price in any of these price ranges.

However, as with the listed price approach, this is not a reliable way to assess real estate value. The selling price may not be actual worth of the real estate property. Commissions, urgency of the sellers, ignorance of buyers about the real estate value, taxes and other factors influence final sale price of the real estate property.

Request for Property Profiles

In many states, you may obtain a “Property profile” document that contains different general property information.  Some of the information that is included in property profile document include:

  • owner’s name,
  • size of the property,
  • legal identification number,
  • sale date and amount,
  • mortgage date and amount,
  • legal characteristics, and
  • land information e.g. value, square feet, acreage etc.

Moreover, the property profile document may contain various other property related reports like comparative market analysis, subdivision statistic, nearby schools and businesses. It may also contain aerial images, demographic sketch vectors and parcel maps when evaluating real estate property.

Actual format of the property profile differs from state to state. The amount of information contained therein may also differ slightly as well. But they all contain comprehensive information regarding the real estate property. On the first page you can find zoning information, lot size, the year it was built, square footage, number of rooms etc. You can utilize the information contained in the property profile document to evaluate real estate value using the above methods.

Most insurance companies will give you the property profile for free in the hope that you will purchase title insurance from them. Just ring up the customer relations department of the nearby insurance company and ask them about the property profiles. You should know the address of the property before calling the customer relation personnel. Once you inform them about the address of the property, they will retrieve the information from the database, print out the property profile document and send it over to you by mail or fax.

In case the property profile document is not available, you can also request for Multiple Listing Service (MLS). The Triangle MLS contains real estate property information that is used when selling the real estate property. But you have to hire a real estate broker to get the listing for you as it is not available for the general public.

Final Remarks!

Finding the current market value is not an exact science but an educated guess. When assessing real estate value, you try to determine the most likely price at which you should buy or sell the property. What you should be looking for when assessing real estate property is a reasonable value of the property that reflects the land value and cost of setting up the property at the site.

As you have learned, there are various methods to assess value of the property. You should choose a method that provides the most accurate representation of the property value. When analyzing the real estate property, some newbie real estate investors complicate the process for themselves. You should try to avoid the complexity and stick to basic principles when assessing the value of the real estate property.

One important point to note is that you should never assess the real estate property based on a real estate firms’ listed price. Although a real estate agency may assess the property correctly, they may not give accurate quotation when listing the property. The listed price is not the real value of the property. The initial asking price of the listed property is often inflated.

Real estate agents list the property at a price that is several thousand dollars above the actual value of the property. The listed price may also reflect the price that the owner wants for the property that may have nothing to do with actual worth of the property. You should do your own homework and consult a reliable professional broker if you want help in evaluating the real estate property.

Call Rodney me at (919) 322-3960 ext. 7 or email if you want to get in touch with an experienced real estate broker with years of experience in helping clients buy, sell or rent real estate property.