Property Valuation

Property valuation is the practice of developing an opinion of a range of value of real property.  It is not an appraisal, but an estimate of value that the property may receive from a buyer and seller coming together to purchase the property while not under duress, and at arms-length.

There are several methods to determine the range of value of a particular property, including:

• Comparable Property Approach
• Income Approach
• Replacement Cost Approach

Comparable Property Approach:
The comparable property approach is used when similar properties within a set distance are available and have sold within a specific time period.  This method compares similar properties based on data such as condition, age, amenities, size and location to determine a range of value.  If the subject property is located in a more desirable area, the price will likely be higher than if located in less desirable areas.  Characteristics of more desirable areas include:

• Availability of similar properties in the area (supply and demand)
• Located in an area with lower crime
• Access to highly educated workforce
• Access to transportation facilities (highways, rail, air, waterways)
• Access to restaurants and personal services
• What is the highest and best use for the property

It is important to know the trend for sales in a particular area; are sales prices are increasing or decreasing?

When the available information is compiled, the properties are analyzed and a price-per-square-foot is determined.  A range of value is then determined to estimate current value.

Income Approach:
For property valuation based on the income approach, it is important to know the following:

Income:

• Rental income
• Signage income
• Vending income
• Fee income
• Tax credits/Enterprise Zone credits, etc.
• Depreciation (building, equipment, vehicles, etc.)

Expenses:

• Deposits due
• Taxes & Assessments (local, state, federal, property, employment, etc.)
• Utilities (water, phone, gas/electric, refuse, internet, etc.)
• Leases (equipment, services, etc.)
• Salaries (temporary, full-time, part-time employees, contractors, etc.)
• Write Downs/Losses (lost income, theft, damage, etc.)
• Contracts (management, maintenance, equipment, labor, etc.)

Also, is the current or projected use, the highest and best use for the property?

Using this information, income is calculated (property is assumed to be debt free).  The income is then multiplied by a factor (based on current market & property conditions) to determine a range of value.

Replacement Cost Approach:
For property valuation based on the replacement cost approach, the following information is needed:

• The size of the property
• The contents of the property (type of utilities, equipment, etc.)
• The construction of the property
• The age of the property
• The condition of the property
• Is the current use the “highest and best use” for the property
• Depreciation taken
• Current material costs
• Current labor costs

This information is used to determine what it would cost to rebuild the property in the event it was completely destroyed, less depreciation.  A range of value is then determined to estimate current value.

Cost of Capital
Keep in mind that the cost of capital (loan rates, interest rates) will greatly determine the value a buyer is willing to pay.  As the cost of the loan increases, the price to be paid decreases since the number of people willing to pay ALL-CASH for a property is smaller than the pool of people willing to borrow money to buy the property.

Care and due dilligence should be excercised when buying or selling a property.