Real Estate Appraisal – Real Estate Valuation

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Real estate valuation for single family homes is typically done by using comparable sales. With income properties this just doesn’t work well. Imagine if you are looking at a 24-unit building. It would be difficult to find similar ones nearby that have recently sold.

It’s also not ideal to use replacement costs for income property appraisal. How do you figure replacement cost if there is no land for sale nearby with proper zoning? This is used as a secondary method, though, and can tell you if maybe you should be building instead of buying.

Real Estate Valuation By Cap Rate

Income properties are bought for the income. Income, then, is what is used to determine value. The rate of return investors in a given area expect gives you the capitalization rate, or “cap rate” for the area. This is what you use to accurately appraise an income property. Below is a somewhat simplified explanation.

The process begins with the gross income of a property. You then subtract all expenses, but not loan payments. For example, if a building’s gross income is $82,000 per year, and the expenses $30,000, you have a net (before debt-service) of $52,000. You then apply the capitalization rate to this figure.

Suppose the acceptable cap rate in the area is .10, for example (ask a real estate agent), meaning investors expect a return of 10% on the value of the property. You simply divide the income of $52,000 by .10. $520,000, then, is the indicated value of the building. Suppose the usual rate is .08, meaning investors in the area expect an 8% return. Then the value would be $650,000.

Easy Real Estate Valuation?

Take net income before debt-service, and divide by the “cap rate:” It’s a simple formula. However, the tough part is getting accurate income figures. Did the seller show you ALL the normal expenses? Did he and exagerate the income? Suppose he stopped repairs for a year, and also showed you the “projected” rents. In that case, the income figure could be $15,000 too high. The building would be worth $187,000 less (.08 cap rate) than your appraisal shows.

One thing smart investors do when buying, is to separate out income from vending machines and laundry machines. If these provided $6,000 of the income, that income would add $75,000 to the appraised value (.08 cap rate). Instead, do the appraisal without this income included, then add back the replacement cost of the machines (probably much less than $75,000) to arrive at a valuation.

Of course, you should be careful with any real estate appraisal method. There is no perfect appraisal method, and all are only as good as the figures you plug into them. If used wisely, though, appraisal by capitalization rates is one of the most accurate methods of real estate valuation.

About the Author

Steve Gillman has invested in real estate for years. To learn more, get a free real estate investing course, and see a photo of a beautiful house he and his wife bought for $17,500, visit http://www.HousesUnderFiftyThousand.com

5 Things to Look for in a Property Appraiser (Real Estate Appraisal)

Homeowners who are seeking a property appraiser often ask How should I choose which real estate appraiser to use? When selecting a property appraiser, keep the following in mind:

Always make sure a property appraiser is licensed or certified by the state to perform real estate appraisals. While state licensing and/or certification isnt always an indication of quality, it ensures that an individual is has met certain standards and been authorized to perform property appraisals. Some states do not require licensing to perform real estate appraisals. It is unwise to use the services of any professional who is not licensed or certified.

Dont be afraid to ask an appraiser for a copy of their license. A good appraiser will readily provide this documentation. Copies of licenses are commonly requested by mortgage brokers and loan officers. Once you get a copy of their license, its a good idea to check with the government agency which issued the document to ensure the license is active and in good standing.

Many excellent real estate appraisers carry a professional designation. The most widely known industry designations are SRPA, SRA and MAI. These designations are issued by the Appraisal Institute. These designations demonstrate an appraiser’s commitment to continuing education and ethical standards. Oftentimes, the standards required to obtain these designations exceed those set forth by state licensing/certified requirements.

Ask the real estate appraiser what percentage of their work is performed in the neighborhood in which the property is located. Appraisers who do a lot of their work or live in a particular area often have a deep knowledge of property values in that area. Additionally, they are more likely to know how neighborhood variables such as school districts and fire departments affect the property values in the area.

Lastly, find out if the property appraiser has experience performing appraisals for consumers as opposed to real estate professionals. Mortgage brokers and loan officers have distinctly different needs than homeowners. An appraiser who understands the needs of homeowners is more likely to help you learn about the appraisal process and answer questions you may have along the way.