Real estate has been one of the most sought out commodities for several decades, and for good reason.
Nevertheless, that does not make up for the fact that, unlike some other markets where the prices are easily identifiable, real estate market is based on the valuation system which is very arbitrary, and not always easy to understand. That is why, no matter how well spread and deeply rooted real estate business may be, success will be guaranteed only to people who are able to correctly identify some property’s value.
Comparing the Property with other
Recently Sold Properties
One of the easiest and the most
widespread methods for determining one property’s real market value
is to compare it with similar recently sold properties in the area
and determine how much the buyers have been, and will be willing to
pay for it.
- Inspect the documents. You
will do that by checking the Land Registry. The listings you will
find may not always be up to date and 100% reliable, but they can
serve as a great guideline. Also, it should not be a bad idea to
take a look at
the Vendor’s Statement, which can
tell you a lot about properties current status.
- Search the Web and Inquire in
Real Estate Agencies. Make a list of the property’s notable
features (location, number of rooms, space, etc.) and use these
parameters to run a short search on some of the reliable websites
and in a few real estate agencies. The average price you will get
should correspond to the real-life market value.
- Take into consideration small
details. Some important details like south-facing garden,
garage, and new kitchen/bedroom always raise some property’s value
above the average.
Determining the Net Operating Income
Net Operating Income is a calculation
used by banks and other commercial lenders to analyze real estate
investments that generate income, so depending on the reason why you
are looking to determine property’s value, you may be forced to
deal with the NOI as well. Net Operating Income equals the sum of all
revenue the property is able to produce (rent, parking fees, various
service fees, etc.) minus the reasonably necessary operating expenses
(utilities, property management fees, repairs, and janitorial fees).
The formula which is used to determine property’s market value
based on the NOI is
Market value = NOI/(r-g) =
NOI – annual return of the property
r – Required rate of return on real
g – Growth rate of NOI
R – Capitalization
The Question of Vacancy Rates and
Gross Income Multiplier
It should be stated, though, that the
variables we use to determine one property’s market value are not
always set in stone, and property’s income generating capacity
represents more than just the sum of its parts. Here are two values
that are covering these variables.
rates. To put it simply, if gross income is one property’s
total income before deduction of the operating costs, vacancy rates
represent the volume in which capacity of that property will be
used. Namely, NOI and gross income are both based on the assumption
that some property will not feature vacant units. Vacancy rate is
the percent we use to determine estimated vacancy over the course of
- Gross multiplier. This
variable is determined by checking out historical sales data, and it
represents the result we get when we divide sales prices of
comparable properties by the gross annual income they have
generated. In that case
Market value = gross
As we can see, all the methods we used to determine certain property’s market value in their essence contain a fair share of uncertainty. Therefore, the most accurate solution may come off as a result of combining all of them, and
finding the average numbers which will be a good and reliable guideline for your future steps.
Daniel is Sydney-based writer and researcher. Recently he has decided to share his business ideas and experiences with blogs and other online communities.