Because there’s no Edmonds Blue Book for real estate property values, it’s important that investors understand how to accurately estimate a property’s current market value. Overpaying for a piece of real estate can be costly later on. Knowing the accurate value of a piece of real estate property is probably one of the most important parts of the whole real estate investment business.
According to the Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice, market value is defined as “The most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the sale price isn’t affected by undue stimulus.”
Here are three commonly used methods for estimating real estate property values:
· Comparison Sales Method – This method uses the recent sale prices of properties within the same area and similar in size, quality, amenities and features.
· Income Method – This method is used to estimate the value of an income producing property by figuring out the net income the produce produces.
· Replacement Cost Method – This method is based on what it would cost to replace the improvements on a piece of property with similar construction methods and materials.
Here is an eight step method for figuring out a rough estimate of a potential real estate property’s current market value.
1. Log onto your county’s property appraiser’s web site to get the tax assessed value of the property.
2. Search the county’s property tax rolls of three to five recently sold properties.
3. When analyzing properties you find, make price adjustments for differences in amenities, special features and the physical condition of the property.
4. Verify the income and expenses that are listed on the income and expense statement of the property you are considering.
5. Analyze the income and expenses for the prior twelve months to figure out the net operating income potential.
6. Figure out the property’s capitalization rate by dividing its potential operating income by the estimated value that you calculated from analyzing recent sales of similar properties in step number three.
7. Estimate the property’s value by multiplying its net operating income by the capitalization rate you came up with for the real estate property.
8. Figure the cost of replacing the improvements on the real estate property by using the same building materials and means of construction.