Conveyancing

Before you sell real estate, it's very important to determine its value/price. The most general method of real estate valuation is to compare similar types of sales in the surrounding neighborhood. This is a quick and rough way to determine a reasonable fair value range when there are properties of similar style available for comparison.

In the case of unique or distinct property, it may be difficult to find a similar style property to benchmark against. You could then use the replacement cost real estate valuation method. This can also create challenges if there is no similar land available to form the comparison from.

An example of using the capitalization rate in real estate valuation:

Income properties are purchased for income which is used to determine value. The cap rate (capitalization rate) of a particular area is found out by calculating the rate of return for investors in that area. By dividing similar properties in the area by the selling price for the property you can determine the capitalization rate.

The use of cap rate in real estate property valuation is hereto explained further:

Take the gross income of the real estate property. Subtract overall expenses excluding loan payments. Use the capitalization rate on the figure achieved. Here is a practical example. If the gross income of the real estate building is $80,000 a year and the expenses are $30,000 then the net income is $50,000. You then apply the capitalization rate on the $50,000 by multiplying it by the derived capitalization rate for the area.

In some cases the challenge to this valuation method occurs when the sellers misrepresent the rental income by inflating the return by creative accounting.

Some universities offer courses in real estate valuation. These courses are aimed at providing knowledge to students regarding real estate valuation methodology and practice. Strict compliance requirements are often enforced for valuation professionals. This can entail following governing body rules and fulfilling minimum practice requirements prior to valuation certification.

You can also purchase real estate valuation software. This software generally incorporates three main topics: a database, a value appraisal engine and a report builder. In general, the database contains information about lands cases, leases, expenses, cap rates, and other variables and data that affect valuation calculations. The value appraisal engine has descriptions of property, income analysis and assignment information. The report creator allows you to output the results of the calculations for visual display.

This is some common real estate valuation application and practice used to obtain real estate value estimates.

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