When it comes to purchasing or selling a property for your business, the first step is to determine the property’s value. Easier said than done – indeed, you have taken a look at the vacant lot that is up for sale in your neighborhood.
Unfortunately, valuing real estate, mainly commercial real estate, is not so simple. If it were that easy, there would be no need for expert appraisers in this industry.
The market value is the property’s perceived rate quoted by professional opinions of what it would sell for at arm’s length. This means that when can sell the price to an independent buyer without any concessions or kickback. The market value reflects the local real estate market, supply and demand, and the competition that exists in the area.
This is not the same as a property’s market price. A market price can be higher or lower than the market value. This is because the price is determined by the seller or the buyer’s agreement during the transactions. The market price could be the same as the market value, or the seller could accept a lower price for the property because he has to sell quickly.
Factors that Affect Real Estate Value
The value of a property might increase or decrease. Several causes affect a property’s value, including the following:
- Location – When it comes to real estate, the site is constantly overstated. Properties in a nice neighborhood near high-traffic areas have a better possibility of appreciating in value.
- Accessibility – More accessible properties can be reached through many modes of transportation and may be valued higher.
- Development – Property in the neighborhood of places being developed is more likely to appreciate. This is because new developments have the potential to increase demand for properties in a specific area.
THREE WAYS TO DETERMINE A GOOD PRICE ON A PROPERTY
The Cost Approach
The worth of a property is estimated by adding the land value and the depreciation value of the improvements. The current market value determines the land value in a specific location.
To assess the individual values of house and lot properties, the land value is usually separated from the building or improvements made to the property.
In this situation, the land value is calculated using the current selling price of comparable properties in the vicinity. After determining the value per square meter, the lot area is multiplied. The end outcome would be equal to the value of your property.
Meanwhile, to assess the value of the building or improvements, you will estimate the price range per square meter of a house in a certain location.
For example, real estate prices in Cebu follow these ranges:
Low-cost housing sells at P 16,000.00 to P25,000.00 per square meter. Meanwhile, middle-tier costs between P26,000.00 and P35,000 per square meter. Lastly, the price for high-end housing is P36,000.00 to P45,000.00.
Sales Comparison Approach
In this approach, the value of real estate is calculated by comparing the prices of properties in a certain locality. There are several methods for determining the actual property value in a given location. For instance, buyers can use public records and information from buyers, sellers, brokers, agents, and real estate appraisers to gather this information.
However, due to distinct features of some properties, there are some modifications to the property value. The following are some of the differences that could result in a change in appraised value:
- Date of Sale
- Lot Area
- Number of Rooms
- Site Size
- Type of Property
Income Capitalization Approach
This approach is more specific to the valuation of commercial and investment assets. Income capitalization is the best method for income-generating properties.
Revenue multipliers or capitalization rates are used. It is applied to the first-year Net Operating Income (NOI). Here, you assume that the NOI is the Gross Potential Income (GPI). After that, you will deduct the vacancy and collection loss to solve for the Effective Gross Income (EGI). You should also subtract the debt service, income taxes, and/or depreciation values applied by accountants.
Some property buyers have used the 1% rule to assess its profitability. The rule of thumb is for the property to generate at least 1% of its selling price every month.