Hello valued Investor,
As we continue to work to get you good investments, I wanted to share this previous newsletter on insights into how one can value a property and better determine risk tolerance. For those who haven’t yet read this, I hope you find it informative.
Best, Ken
Valuing Property and Risk Tolerance
As a Lender, correctly valuing property is crucial for making investment decisions. Knowing the multiple valuation methods and approaches can give one a competitive advantage when it comes to understanding a property’s value. Market conditions, property condition, location and other factors should be carefully evaluated when determining value.
There are numerous methods and approaches that can be used to assess the value of a property, the 11 most common ones are listed below. The first 5 options are the most common methods we employ with our investment offerings:
1. Average of Online Sites:
This method involves using an average of multiple online sites. Each online site has their own algorithms used to value a property, and we take the average of each to come up with an estimated value. Most of the algorithms determine value through comparing similar square feet, bed and bath count on houses that have recently sold. Rarely does it take into consideration quality of the house, any updating, etc. It can also miss any legally permitted additions as it takes time for the county to update their records before the various online sites get access to the updates.
Examples of some sites used are: Zillow, Realtor.com, Trulia, Realty.com, Homes.com, Movoto, etc.
2. MLS Comparables:
This method involves using MLS Sales as the comparables to determine what it would likely sale for if sold on the open market. This can be done in-house on a property local to us as we have access to the County’s MLS database. This can also be provided by the Listing Agent when the transaction is a purchase loan, as the Listing Agent will have a Sales Package that is generally prepared for the Seller giving that estimated value to list the house.
3. Comparable Analysis:
This method involves using a program that is specifically designed to give an estimated value based on factors that are input into the program. You would put the address, size, bed/bath count, any amenities, and it would then give an estimated value – much like the algorithms used from #1 above. Some programs allow you to input additional information, such as a recent remodel and it will take this into consideration.
4.Broker Price Opinion (BPO):
A BPO is an estimate of a property’s value, provided by a licensed real estate Broker or Agent, based on their knowledge of the local market, recent sales data, and property condition. These will show the estimated value, a summary of information, as well as the Comps that were used to come up with the stated value.
5. Appraisal:
Hiring a licensed appraiser to conduct a comprehensive analysis of the property is the next method. Appraisers use a combination of approaches, data analysis, and market research to determine a property’s value. This is generally considered to be the most accurate when it comes to an estimated valuation, however, there have been many instances of appraisers coming in with a false valuation – for any possible reason. A review of the appraisal, the comps used, etc. should be done to verify the stated value.
6. Income Approach (Capitalization rate or income capitalization):
This approach is commonly used for Commercial, income-producing properties. The value of the property is determined based on its ability to generate income. The net operating income (NOI) is divided by a desired capitalization rate to arrive at a property value.
7. Cost Approach (Replacement cost or Reproduction cost):
This method involves estimating the cost to replace or reproduce the property, taking into account the current market value of land and the cost of construction.
8. Gross Rent Multiplier (GRM):
This method is commonly used for residential rental properties. The property’s value is determined by multiplying the gross rental income by a set multiplier (GRM), which is based on comparable properties in the area.
9. Discounted Cash Flow (DCF) Analysis:
This method is used for commercial real estate and income-producing properties. It involves projecting the property’s future cash flows, including rental income & expenses, and discounting them back to present value using a chosen discount rate.
10. Cost per Square Foot:
This method involves dividing the property’s sale price or value by its total square footage to determine a cost per square foot. Comparable properties with similar square footage can then be used to estimate the subject property’s value.
11. Replacement Cost New, Less Depreciation:
This method estimates the cost to replace the property with a similar one, then subtracts depreciation based on factors such as age, condition, and obsolescence.
So, when considering real estate investments, we feel that “valuation” is of the utmost importance, as it is the property’s equity that you are using to help secure your investment. Review all comparables you are able to find, review all data provided, review everything to allow yourself to make an informed decision on the property you will be investing in.
Each Trust Deed is its own individual scenario, and we provide detailed information for you to review, to assist you in conducting your own due diligence. We work hard to run the borrower and property through a myriad of pre-qualifications, which is done prior to sending out our Investment Offerings.
I hope you found this informative and helpful! And as always, I look forward to working with you in the near future, on another investment.
