Whether you’re buying a property or looking for real estate investment opportunities, having a consultant who performs in-depth evaluations can save you from challenges. However, if things have gone wrong and you, unfortunately, end up in a real estate dispute, having your attorney retain a real estate valuation expert witness can go a long way toward helping ensure a favorable outcome.
A real estate valuation expert is a professional who has the experience and the analytical skills to supply a well-grounded assessment of a real property’s value. They can be real estate consultants, appraisers, or real estate economists. Furthermore, some provide expert witness testimony on various aspects of a dispute involving real estate law. For instance, they can write a report on how damages to a property impact its value or they can testify whether an appraisal of a building’s market value is well-founded.
Valuation experts use a variety of means and methods to calculate a property’s value depending on the situation. Read on to learn more about what property valuation entails.
How do you calculate the value of a property?
Let’s say there’s a property in San Diego or Seattle, Washington that you want to sell, buy, or invest into. Before you can tell if a property is a good investment, you must first determine the property’s true value.
Below are the processes and ways that a real estate valuation expert can calculate a property’s value.
Determine FMV (Fair Market Value)
This is the amount that an informed buyer is likely to spend on the property, and that an informed seller is likely to accept. The FMV can be determined by getting comparable transactions (similar properties in the same area that have been sold during the previous 12 months) from the tax assessor’s office, title company, or through a real estate agent.
Replacement Cost Method
How much would it cost to rebuild this same structure on this same property? Naturally, this valuation method is designed for one-of-a-kind buildings or buildings without recent comparable. It is also commonly used for property loss cases.
Calculate the Possible Income Over Time
If the structure is an income property, find out how much the current owners charge for rent. You can get this information from the owners themselves, or from the local rent managers.
Determine the Annual Net Operating Income
Deduct maintenance cost from the expected annual rental income. These maintenance costs include repairs, management fees, property taxes, and insurance.
Calculate the Capitalization Rate
Capitalization rates are readily available for each marketplace for each product type with sources like Co-Star and leading brokers.
In addition to the above, Environmental Due Diligence and Property Condition Assessments are often performed in order to understand the recognized environmental conditions and the property condition. Also, energy disclosure services have become more and more common during the real estate due diligence period.
The process of calculating the value of a property may become daunting to potential real estate investors or buyers. Having a professional property valuation consultant will not only ensure you get a thorough well-grounded evaluation on aspects of the property; they will also supply their findings in the form of a detailed property valuation report.
What is a Property Valuation Report?
The property valuation report is the written work product of the real estate consultant’s valuation research and calculations. It contains detailed information about the property in question and the valuer’s opinion, backed with supporting evidence.
A standard property valuation report contains:
- Date of inspection
- Purpose of evaluation
- Updated title deed information
- Property location
- Description of the property
- Updated building zoning and zoning characteristics
- Description of the local market
- Market value
- Valuation methodology
- Insurable value
- Forced sale value
- Attachments (building zone, satellite photos, comparable sales, cadastral plan)
What is an Appraiser?
The Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice (USPAP) defines an appraisal as “the act or process of developing an opinion of value of or pertaining to appraising and related functions such as appraisal practice or services.” The USPAP definition of an appraiser is someone who performs valuation services that is independent, impartial, and objective.
A variety of real estate consultants can provide valuation services for properties as an appraiser. The only license requirement is for “federally related transactions,” a specific subset of real estate transactions; for those, the appraiser needs to be licensed by the state.
While most other transactions don’t legally require a license, federally chartered banks and some other institutions often require appraisals by an MAI appraiser for lending. MAI appraisers are members of the Appraisal Institute who is designated and certified through the organization. Outside of that, a client can hire a consultant that has neither MAI nor licensed unless the client wants extra assurance.
Not All Valuations Are Equal
Plenty of investors and RE professionals make the mistake of thinking that valuations done by different consultants are essentially the same. The level of detail inside a property valuation report depends on the client’s needs and the scope of research the valuer is hired to perform.
For example, in real estate transactions in California, appraisers are typically hired to perform a Sales Comparison approach to determine Fair Market Value and features of the property. These appraisals, while objective, produce an estimate based only on similar properties in the area with recent sales data.
However, if the buyer wanted a valuation of an income property (such as an apartment), a consultant who specializes in Cost and Income Capitalization approaches would be able to produce a much more detailed report than one who only does sales comparison approaches. In a property loss case, the insurance firm or attorney would want a real estate valuation expert witness to focus on cost of replacement calculations instead.
Where can you find a trusted real estate valuation expert witness?
VERTEX is the premier group of real estate consultants. With dozens of top-notch construction and real estate professionals, VERTEX is uniquely qualified to provide well-supported, detailed real estate valuations and to assist you with your real estate matters.
To learn more about VERTEX’s Forensic Consulting and Expert Witness Services or to speak with a Real Estate Expert, call 888.298.5162 or submit an inquiry.
This article was originally published by Xpera Group which is now part of The Vertex Companies, LLC.