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Real Estate Appraisal

Real estate appraisal, property valuation or land valuation is the process of valuing real property. It can represented in the balance sheet as a fixed asset with its value derived by the purchasing price of the real estate and in any additional costs such as development or renovation expenses.

There is a difference between the market value of the property and its price. A price paid might not represent that property's market value.

For investment properties alternative methods to market value are used to assess the value of the property. These methods are:

  • income (investment) method
  • profit (accounts) method
  • development (residual) method
  • comparable method
  • contractor's (cost) method
  • It is important to note that each of the above methods are applicable to different types of properties and produce different values. The choice of method is, in part, decided by the purpose of valuing a property. Some of the more common purposes behind property valuations are:

  • Sales Report: A price estimate of the property for marketing purposes or growth projections.
  • Accounts: The value of the property has to be reported in the statutory annual accounts of the owner. For professional property investors management accounts may also have to be prepared on a quarterly or monthly basis.
  • Loan Security: Banks and other lenders require a property valuation as a collateral for a prospective loan. This is used to determine the amount of loan which the value of the property can support. This is called the loan to value ratio.
  • Mininum Price: The minimum asking price a property has to be ascertained when selling the property by tender or auction.
  • Reserve value: A reserve value has to be placed on the property for an auction when unusual or special circumstances pertain to the property.
  • Insurance: There is a requirement to value a property for insurance purposes. The normal basis of valuation is the cost of replacing the building in case of damage or total destruction.
  • Taxation: Properties have to be valued for taxation purpose. Taxation can apply direct to the property itself (i.e. capital) and to the revenue it may generate for the owner.
  • Compulsory Purchase: Government building schemes may involve the acquisition of private property. Since this acquisition is forced the property has to be valued to determine the compensation due to the owner.