Wendi Fryman Real Estate

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Here is a brief over view of Property Valuation.

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Net present value is the present value of all future cash flows produced by a rental property less the amount of initial cash investment required to purchase the investment property.

Net present value (NPV) considers the time value of money and therefore is a popular real estate investing rate of return. Say, for instance, that you require a 10% rate of return on your investment. Net present value (with consideration for the timing) reveals whether the cash flow produced by that property would give you a 10% rate of return.

Sales Comparison Approach
The sales comparison approach is used at property tax hearings for houses, land and owner-occupied buildings. It is sometimes used for income properties as a secondary method of valuation. To perform the sales comparison approach you need information on sales of property similar to your property. You can obtain this information from a variety of sources including the appraisal district, real estate appraisers, brokers and third party vendors. Inspect and photograph the comparable sales making detailed notes regarding differences between the comparable sales and your property. Then make adjustments for differences between the subject property and comparables. Adjust comparable sales to the subject property. For example, if a comparable sale has four bedrooms and your home has three bedrooms, make a downward adjustment to the sales price to the comparable sale to bring it down to the level of your house. Select sales as similar as possible to the subject property to minimize adjustments. Comparable sales data is given strong consideration in property tax hearings for houses, land and owner-occupied commercial buildings.
Determining who is qualified is relatively easy to do several organizations hold members to standards that other local organizations do not. The Appraisal Institute and The National Society of Real Estate Appraisers. These organizations hold their members to very high standards. Classes and certifications are part of a continuing education requirement. The ethical standards that members are required to stick to are high and therefore, using an appraiser that is a member of one or both of these organizations is a great way to find a qualified and knowledgeable appraiser to value your properties.

Just about all lenders, both private and institutional will require an appraisal on a property prior to funding a new mortgage loan. Appraisals attempt to justify the loan amount the individual needs to purchase the home; this usually takes place once the buyer and seller have agreed on a final contract price.

The appraiser's duty is to determine the "fair market value" of a property; valuations completed in several different ways. The first is "Cost Approach" this determines the replacement value of the land and structures at today's rates, less depreciation. Price Method is the primary approach to estimate property value. This method analyzes recent selling prices of properties in the area using comparables to value properties. In many cases, appraisers use more then one method to determine the property value.

Income Approach
The income approach is typically used for income properties. The basic theory is that investors purchase income properties for the income stream they produce. This income stream can be converted to an indication of market value for the property. The primary steps in the income approach are to estimate the potential gross income using rent comparables and information regarding actual income at the subject property. An allowance for vacancy is estimated based on the performance of the subject property and average vacancy in the area. Operating expenses are estimated using actual expenses at the subject property and market expenses for similar properties. The net operating income is calculated by deducting vacancy and operating expenses from the potential gross income. Net operating income is converted to an indication of market value by dividing it by the capitalization rate.