Oct 26, 2019
Do how to properly value a
property? I know a lots of people don't know much about it. That's
one of the questions I get quite frequently and I thought I'd talk
about that today.
The first thing that you
need to consider while determining the value of the property is to
find out whether the property is residential or commercial.
Four units or below are
considered residential and they are valued a lot differently than a
commercial property. One of the ways to find a value is to get an
appraisal. The other way is to get a market comparable done for you
by a realtor. This approach is simply a comparison of similar homes
that have sold locally over a given time period.
You also can get an
appraisal value after repair if the property needs a lot of work.
It costs you a little bit extra but will solve your purpose if you
need financing.
Those are the most popular
ways to get a valuation for the residential properties.
And when it comes to the
commercial property it's a different story.
Most of the time people are
ready to make an offer or are getting ready to make an offer but
they don't have all the numbers up front for the property. So you
can't make a really good offer and many end up losing the deal.
So I remind all my students
to get the property under contract and make an offer since that
offer is negotiable till you remove the conditions from the
contract. Get it under contract even if you need to give an asking
price or the over asking price.
Once you have the property
under contract then you can ask for all the financials. Once you
have the financial information, you can now look for the net
operating income (NOI). I would suggest that you take the financial
numbers for at least 3 years for any property and see what the net
operating income is.
A lot of time, some property
owners do a lots of renovations or maintenance and the NOI can be
misleading. Alternatively, you also need to take a look for the
deffered maintenance since some property owners have not been
taking care of their buildings and so you need to make sure that
you're not over paying for that property.
Always analyze a few
properties even you're not buying them so you get to know the net
operating income which will support the mortgage payments and gives
you the positive cash flow.
There's also a Cap Rate that
you may need to consider but it's not the major factor that I look
for.
There isn't a
one-size-fits-all solution, so a combination of these factors may
need to be applied. Investors can use the sales comparison
approach, the income approach, and the cost approach to determine
property values.
So determining the cost of
and the return on an investment property are just as important as
figuring out its value.