A person investing actively in real estate is known as a real estate investor. It is imperative for such investors to acquire basic valuation skills. These skills aid them in making, buying and selling decisions. Various models, tools and techniques have been designed in this regard.
Real estate valuation and stocks/ bonds valuation are fairly similar. However, the leasing space is considered in real estate valuation and product/ service selling in case of stocks/ bond valuation. Individual and real estate valuations have been discussed in the article to enhance the knowledge regarding prospects of valuation methods.
Investor Valuations:
Investor valuations and certified appraisals differ in certain aspects. Some individuals tend to ignore this difference. An investor possesses varying opinions regarding the attributes of the property. These may include the attractiveness of the property, assessment of risk, and the lease rates tenants are willing to pay for it. Appraisers, on the contrary, employ methods that may lag behind the market. A common drawback is over or under estimation of value with respect to the changing market trends.
Thus, valuation plays an important role in the accurate calculation of income-generation potential of a property, in accordance with the varying market conditions.
Real Estate Valuation:
Income generating investments and bonds and stock valuation make use of income-approach. Discounted Cash Flow method determines an asset’s Net Present Value. This value indicates the present value of property that generates an investor’s return, adjusted with the risk. Thus, the Required Rate of Return is calculated. Investors make use of these values to make buying, holding and selling decisions.
Valuation of a property is mainly the determination of revenues and deduction of expenses in order to maintain the lease.
Types Of Leasing:
Lease is an agreement between a leaseholder and a property-owner. It is the direct source of income estimates. This contract contains information regarding the property, terms and conditions and also the modes of income collection. The three main types of leases are:
- A certain portion of the increase in expenses after the occupation of property by the tenant is paid by the tenant and is called as Net leases.
- A pro-rata share of property expenses is paid by the tenant. It is called Triple-net (NNN) leases.
- No payment other than the rent id made by the tenant, in full-service leases.
Expenses:
Income valuation involves estimation of revenues and then deduction of certain expenses.
- Property level expenses incurred for management of property, for instance, utilities, taxes and cleaning, etc
- Capital expenditures incurred for maintenance of property.
- Costs incurred to accomplish leases and draw tenants.
Buy, Sell or Hold:
A property is said to be attractive if the value assessed by the investor is higher than the appraised offer. This indicates the high probability of returns of investment, keeping in view the risk assessment. These factors aid the buying decisions and also lower the chances of errors in judgment.
On the contrary, property is more attractive for selling if the assessed value is less than what the buyer has offered to pay. These indicators point out the most favorable conditions for making property selling decisions.
Moreover, another indicator is the market value of the property and the assessment of risk in order to estimate the returns on investment. If the assessed value and the market value are within the same range then the owner has the leverage to make a holding decision. In this case, the decision of buying or selling will be made pending in order to wait for the perfect asymmetry between the market value and the investor’s valuation.
Right Time For Buying:
Financing is an important factor in determining the right time for buying and selling of property. However, it does not quality as the only factor determining the value of the property. This is because the buyers have been varying financing alternatives. Investors having already financed properties are not affected by this phenomenon.
Although not very eminent in buying decisions, financing plays a major role in selling decisions. It is important for investors who have the advantage of receiving desired finances in case such offers are not available in the market any longer. This also generates opportunities for risk adjusted returns and thus, favors the investor.
