Looking For An Investment Property? Here's What You Must Know

Posted by Ako HouseBuyers on April 19th, 2021

When exploring various real estate options, every investor often wonders how much they are going to pay eventually. It's essential to mention that evaluating any real estate property for the eventual payment is called property valuation.

Here's a detailed breakdown of the three primary property valuation methods that can help you in the future.

Property Valuation- The Definition

When a willing seller determines the economic value of any real estate property against a knowledgeable purchaser, it is called property valuation. To put it simply, when both the buying and selling party have the necessary data, along with the consent to do the business, it can be termed as property valuation.
It's essential to mention that a property's value may not always align with its price. For better understanding, there are plenty of cases where a financially vulnerable seller agrees to sell his property despite the quoted price being inferior to the market value.

Property Valuation: The Importance

There's no denying that property valuation is a highly essential concept in the real estate property business. This is primarily because property valuations contribute to determining property taxes as well as property insurance.

Furthermore, mortgage lenders also refer to property valuation before sanctioning a loan. This effectively restricts the potential buyer from overpaying for a real estate property or securing the bank from giving away overwhelming financial loans against less than average properties.

One must also not mention that property valuation plays a crucial role in legal settlements, like divorce, real estate settlement, or a lawsuit.

How To Do A Property Valuation And How Much Does It Cost?

It's vital to note that only a professional certified appraiser typically conducts a property valuation. However, any real estate investor can essentially do property valuation as well. Financially speaking, a property valuation for a single-family apartment can cost up to 400$ on average. However, this estimation is subject to the property's size.

Here's the detailed breakdown of the three most common property valuation methods that you can use when you see the "We buy houses Maryland" board next time.

1- The Income Approach

When it comes to property valuation, the income approach is one of the most commonly practiced real estate properties. The general idea behind the income approach is to calculate a property's current value by dividing the net income by the capitalization rate.

In the beginning, the property valuator must gather all the income and expenses statements for both the house in question and identical properties in the locality. This will contribute to estimating the net operating income.

The four steps mentioned below can effectively help in calculating the net operating income (NOI):

• Figure out The Gross Potential Income: The evaluator must identify the total income a real estate makes with full occupancy.
• Figure out The Adequate Gross Income: The evaluator must identify the adequate gross income by determining the vacancy costs based on similar properties in the vicinity. It's essential to mention that the figure indicates the average loss in revenue due to probable vacancies.
• Figure out The Property Expenses: When discussing the property valuation, it is only necessary to mention that expenses are categorized into two sections—fixed and variable expenses. For astute understanding, the expenses that remain unchanged despite the progression of time can be classified as fixed expenses. E.g., property taxes and mortgage payments. On the other hand, variable expenses are expenses that tend to vary with the flow of time. E.g., utilities and management fees.
• Calculate NOI: The valuator must calculate the net operating income (NOI) by subtracting the estimated expenses from the adequate gross income.

2- The Sales Comparison Approach

When it comes to the sales comparison approach, the valuator leverages the market data for sale prices to calculate a real estate property's value. For simple understanding, the property valuation is calculated by a property against other similar but recently sold properties in this method. The properties that are used in this comparison are known as comparable or comp. They need to share some trait or the other with the property in question.
But having said that, these properties generally need adjustments to account for differences- this is primarily because no two properties are identical. The evaluator must have eth right eye for figuring out the differences between the comparable properties to make proper adjustments during the comparison. The sales comparison approach is typically used for single-family homes, as there are more comparables available for reference.

3- The Cost Approach

Finally, the cost approach is another property valuation method practiced in the real estate business. This method determines the property's value by combining the land cost with the expenses for replacing the property. The physical and functional depreciation now subtracts this. The cost approach is typically used for specific real estate properties, which don't sell quickly, such as hospitals, schools, and government buildings.
In conclusion, it's only necessary to mention that three property valuation methods discussed throughout this article are commonly and effectively used to evaluate a real estate property. However, determining the best of the three methods largely relies on the property type and information availability on the "We buy houses Maryland" advert. This method can effectively help you to price your preferred real estate property.