Property Analysis

Our property analysis is completely different and accurate than other sources Analysis. We will take all MLS values, Price ranges, Rehab costs are the basis for our analysis and then after we can do analysis with our standards and strategy. We will provide Price to offer, Rental Analysis, Comps, ARV Values & Rehab costs of particular property.

Real estate property analysis is the process of developing an opinion of value for real property i.e market value. Real estate transactions often require appraisals because they occur infrequently and every property is unique (especially their condition, a key factor in valuation), unlike corporate stocks, which are traded daily and are identical. The location also plays a key role in valuation. However, since property cannot change location, it is often the upgrades or improvements to the home that can change its value. Appraisal reports form the basis for mortgage loans, settling estates and divorces, taxation, and so on. Sometimes an appraisal report is used to establish a sale price for a property.

Types of value:

There are several types and definitions of value sought by a real estate properties. Some of the most common are:

  • Market value – The price at which an asset would trade in a competitive Walrasian auction setting. Market value is usually interchangeable with open market value or fair value. The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
  • Value-in-use of a cash flow that an asset generates for a specific owner under a specific use. Value-in-use is the value to one particular user, and may be above or below the market value of a property.
  • Investment value – is the value to one particular investor, and may or may not be higher than the market value of a property. Differences between the investment value of an asset and its market value provide the motivation for buyers or sellers to enter the marketplace. The value of an asset to the owner or a prospective owner for individual investment or operational objectives.
  • Ad Valorem Tax Value – Is the value used for taxation purposes and is determined by the collection of data through the mass appraisal process. The mass appraisal process applies the data collected through various sources to real property to determine taxable value

Price vs value

There can be differences between what the property is really worth and what it cost to buy it. A price paid might not represent that property's market value. Sometimes, special considerations may have been present, such as a special relationship between the buyer and the seller where one party had control or significant influence over the other party. In other cases, the transaction may have been just one of several properties sold or traded between two parties. In such cases, the price paid for any particular piece is not its market "value" (with the idea usually being, though, that all the pieces and prices add up to the market value of all the parts) but rather its market "price".

At other times, a buyer may willingly pay a premium price, above the generally accepted market value, if his subjective valuation of the property was higher than the market value. One specific example of this is an owner of a neighboring property who, by combining his own property with the subject property, could obtain economies-of-scale and added value. Similar situations sometimes happen in corporate finance. For example, this can occur when a merger or acquisition happens at a price which is higher than the value represented by the price of the underlying stock. The usual explanation for these types of mergers and acquisitions is that "the sum is greater than its parts", since full ownership of a company provides full control of it. This is something that purchasers will sometimes pay a high price for. This situation can happen in real estate purchases too.

But the most common reason for value differing from price is that either the buyer or the seller is uninformed as to what a property's market value is but nevertheless agrees on a contract at a certain price which is either too expensive or too cheap. This is unfortunate for one of the two parties. It is the obligation of a real property appraiser to estimate the true market value of a property and not its market price.

Frequently, properties are assessed at a value below their market values; this is known as fractional assessment. Fractional assessment can result in properties that are assessed at 10% or less of their given market values.

Main approaches to value

There are three traditional groups of methodologies for determining value. These are usually referred to as the "three approaches to value" which are generally independent of each other:

  • The sales comparison approach is comparing a property's characteristics with those of comparable properties that have recently sold in similar transactions.
  • The cost approach is the process buyer will not pay more for a property than it would cost to build an equivalent
The sales comparison approach

The sales comparison approach is based primarily on the principle of substitution. This approach assumes a prudent individual will pay no more for a property than it would cost to purchase a comparable substitute property. The approach recognizes that a typical buyer will compare asking prices and seek to purchase the property that meets his or her wants and needs for the lowest cost. In developing the sales comparison approach, the appraiser attempts to interpret and measure the actions of parties involved in the marketplace, including buyers, sellers, and investors.

Data collection methods and valuation process

Data is collected on recent sales of properties similar to the subject being valued, called "comparables". Only SOLD properties may be used in an appraisal and determination of a property's value, as they represent amounts actually paid or agreed upon for properties. Sources of comparable data include real estate publications, public records, buyers, sellers, real estate brokers and/or agents, appraisers, and so on. Important details of each comparable sale are described in the appraisal report. Since comparable sales are not identical to the subject property, adjustments may be made for date of sale, location, style, amenities, square footage, site size, etc. The main idea is to simulate the price that would have been paid if each comparable sale were identical to the subject property. If the comparable is superior to the subject in a factor or aspect, then a downward adjustment is needed for that factor. Likewise, if the comparable is inferior to the subject in an aspect, then an upward adjustment for that aspect is needed. The adjustment is somewhat subjective and relies on the appraiser's training and experience. From the analysis of the group of adjusted sales prices of the comparable sales, the appraiser selects an indicator of value that is representative of the subject property. It is possible for various appraisers to choose a different indicator of value which ultimately will provide different property value.

Steps in the sales comparison approach
  1. Research the market to obtain information pertaining to sales, and pending sales that are similar to the subject property
  2. Investigate the market data to determine whether they are factually correct and accurate
  3. Determine relevant units of comparison (e.g., sales price per square foot), and develop a comparative analysis for each
  4. Compare the subject and comparable sales according to the elements of comparison and adjust as appropriate
  5. Reconcile the multiple value indications that result from the adjustment (upward or downward) of the comparable sales into a single value indication
The cost approach

The cost approach was once called the summation approach. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. The value of the improvements is often referred to by the abbreviation RCNLD Reproduction refers to reproducing an exact replica; replacement cost refers to the cost of building a house or other improvement which has the same utility, but using modern design, workmanship and materials. In practice, appraisers almost always use replacement cost and then deduct a factor for any functional dis-utility associated with the age of the subject property. An exception to the general rule of using the replacement cost is for some insurance value appraisals. In those cases, reproduction of the exact asset after a destructive event like a fire is the goal.

In most instances when the cost approach is involved, the overall methodology is a hybrid of the cost and sales comparison approaches. For example, the replacement cost to construct a building can be determined by adding the labor, material, and other costs. On the other hand, land values and depreciation must be derived from an analysis of comparable sales data.

The borrower may prefer to select an independent surveyor to undertake the HomeBuyer Report or Building Survey.

Mortgage valuation report

A mortgage valuation is for the benefit of the lender. Its purpose is merely to confirm the property is worth the price paid, in order to protect the lender's interests. Invariably there is a disclaimer on the report that confirms that the surveyor has no responsibility to the borrower. This is a legally valid exclusion.

RICS Condition Report

This is short report that looks briefly at the property to report on the visual condition of nine external elements of construction, nine internal elements of construction, seven services supplied to the building, and three key components of the grounds in which the property is sited. The reports rates conditions from 1 - good, 2, - needing attention in the near future, 3 - needing attention now using a traffic light system to draw attention to things that matter.