Valuers will talk about property valuation how do you value a property how do you know much how do you know what a property is worth there are three primary property valuation methods first one Property valuers will start with is the sales comparison method sales comparison is what you’re going to use a lot for if you’re flipping houses.
Or if you’re rehabbing a house oftentimes people use this for residential go ahead and spell it out fully or if it’s something they’re holding short-term as opposed to a long-term hold so the way that sales comparison works is you have an area say this is your neighborhood now you’ve got an area here some streets small houses here’s the house that you’re going to buy and probably.
So after you fix it up or whatever you do all right let’s say there’s another house right down here same kind of house same number of square feet very similar location this sold for two hundred and fifteen thousand within the last six months.
Then there’s another one over here that sold for say one hundred ninety thousand in the last six months all right so if you do that if you use the sales comparison method you will value this house that you’re buying or selling based on other sales that have occurred of similar houses similar buildings in that same area that is these sales comparison method another property valuation method that you’ll use is the capitalization property valuation method.
So Property valuers have talked about cap rate before if you need a refresher you can go back to the blog where Property valuers talked about cap rate price and No I so the comparison or say the cap capitalization method pretty much looks at the cap rate what is the cap rate for a given area is it % cap rate or even an area with the % cap right.
So you want to find what your cap rate is in your area and figure out what the property is worth based on that pretty much if you’re buying a cash flowing property to go like this what you’re doing is buying an income stream so what you want to do just figure out what’s the no I once you have the no I figured out.
And you know what the cap rate is for a certain area let’s say you’re in an area with a % cap rate then you can find the price how much that property is worth so let’s just go ahead and say that you’ve got a property with an no I of $, your area has a % capitalization rate that’s what properties are selling for so your price will be sorry $, the way that Property valuers got to that number was by taking the No I and dividing it by.
Once again if you need a refresher on how the capitalization of how the cap rate works in relation to No I and price. let’s go ahead and separate these guys okay so property valuation method sales comparison method capitalization method is called replacement cost method so you bet an office building.
You’re thinking about buying it if you’re going to use the replacement cost method to figure out how much to pay for this office building you want to find out how much it would cost to build a brand new office building.
Okay how much would it cost to build a brand new office building in a location near the one where you’re buying it on land that is just as desirable or as little house as little desirability as the original office building and also to build it with the same quality of materials.
It’s pretty much imagine all things are the same how much would it cost to build an office building exactly the same as this one that’s how you use the replacement cost method so this one isn’t used a whole lot mainly what you’ll use as a sales comparison and capitalization method.
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