How to Accurately Assess a Real Estate Investment Property’s Market Value

Many real estate investors who are starting out make the mistake of paying too much for property. In fact, overpaying for an investment property is the main reason why many newcomers don’t make a profit from their real estate investment. This is because many beginning real estate investors are grossly undercapitalized, and lack the resources necessary for subsidizing their overpriced investments.

For many new real estate investors, overpaying for their first property usually turns out to be a very costly mistake that could lead to the end of their real estate business. That is why it is absolutely important that you have knowledge of how to accurately assess the present market value of investment properties. This is the single most vital element of the whole real estate business.

The Difference Between Appraised Value and Assessed Value

You need to understand the difference between an investment property’s appraised value and its tax-assessed value. Appraised value refers to the value estimate of a property given by a qualified property appraiser using recognized methods for the kind of property being appraised. Tax assessed value refers to the value ascertained by the local tax authority for a piece of land and the improvements being carried out on the land.

Common Methods of Estimating Property Values

The following are the main methods applied by property appraisers to assess property values.

1. Comparison Sales Method

This method establishes an investmnt property’s value based on recent sale prices of other properties within the same vicinity and comparable in quality, size, features and amenities. However, for accuracy, price adjustments should be made in the case of comparable properties that were sold at excessively low prices, or on exaggerated favorable financial terms.

1. Income Method

This method is used to assess the value of an income-generating property on the basis of the net income produced by the property. Under this method, value is computed using a capitalization rate and gross rent multiplier. The capitalization rate, also known as the cap rate, is computed by dividing a property’s annual operating income by the purchase price. Gross rent multiplier, also referred to as GRM, is computed by dividing the property’s purchase price by its monthly gross operating income.

When reading a property’s statement of income and expense, you need to be aware that the owner might have played around with the figures to hide something. Be sure to cross-check everything listed on the property’s statement of income and expense.

1. Replacement Cost Method

This method is based on the estimated cost of replacing renovations on the property using similar construction methods and construction materials. Replacement costs are computed by dividing the total square feet in the property by the construction cost per square foot. For instance, for a three thousand square foot property that cost $330,000 to build, the replacement cost will be $110 per square foot.

Usually, you can get a free replacement cost quote by calling an independent insurance broker specializing in offering casualty insurance and property coverage for commercial and residential buildings.  Property replacement costs are computed using a formula based on the property’s location and its street address, type of construction, age, number of stories, type of roof, heating and cooling system, square footage and current use.

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