Tutorial 4

What is real estate valuation and why is it important?

• Real estate valuation is the process of determining the market value of a property
• A valuation represents the "opinion" of a qualified property valuer about what a property is worth based upon the type of valuation and instructions given
• Valuations are important for property owners, buyers, lenders and investors to understand the value of a property
• It affects decisions about buying, selling, financing and investing in real estate.

NOTE:

• size depending, location are factors for property valuation

Q2. How is market value for real estate defined

• Market value is the estimated amount that a property would sell for in an open and competitive real estate market
• Assumptions:
  • both the buyer and seller have full knowledge of the properties condition and characteristics and
  • There are no outside factors affecting the transaction, such as undue pressure pressure to sell or a lack of willing buyers
• The market value is typically determined by a Property Valuer, taking into account
  • Difference factors such as property's location, size condition and amenities

NOTE:

Whatever way you do the valuation; it is usually base on past data

• current trends that are in place
• Whatever method we use to value it, it is based on historical data + current trends
• Easier to have an understanding of a future trends
• Amenities improvement, naturally think the property price will go up

Q3. How does the cost approach to real estate valuation work and what types of properties is it typically used for?

• The cost approach to real estate valuation works by estimating the cost to replace of reproduce a property
• The considering factors such as depreciation, obsolescence, and physical deterioration
• It is typically used a part of the summation method of valuation and for existing use valuations

NOTE:

• property on the land will depreciate - must apply things like depreciation to discount the property

Q4: what is the income approach to real estate valuation and how is it used to value commercial properties

• The income approach to real estate valuation is used to value properties that generate income
  • apartment buildings
  • office buildings
  • or retail centres
• It estimates the value of a property based on its potential income stream, using method methods such as:
  • The capitalisation method
  • Discounted cash flows method

Q5: How does the sale comparison approach to real estate valuation works and what types of properties is it typically used for?

• The sale comparison or direct comparisons or market comparison approach real estate valuation
  • Works by comparing the subject property to recently sold properties that are similar in location, size condition and other key factors
  • Typically used for residential properties that are not valued based upon their income producing potential
• One of the challenges of this approach is:
  • Limiting the number of adjustments to the sales evidence to the property being valued to allow for elements that aren't completely comparable to date of valuation will always be different to the date of sale

Q6 What are some of the key factors that affect the value of a property, regardless of the valuation approach used?

• key factors that affect the value of a property include:
  • location
  • size
  • condition
  • amenities

Q7 Define the terms "Potential Gross income", "Effective Gross Income" and "Net operating Income". What is the relationship between these terms and how does it affect the valuatuon of income producing property

• Potential Gross Income
  • The total income attributable to real property at full occupancy
  • It is the rent actually passing between tenant and landlord
  • Plus the estimated current market rent of any space vacant at the time
  • The passing rent may not not be the same as current market rent - especially when leases have been in place for some time
• Effective Gross Income
  • The anticipated income from all operations of real property adjusted for vacancy and credit losses
  • A credit loss would be represent by a tenant in default of rent payment
• Net Operating Income
  • the actual or anticipated net income remaining after deducting all operating expenses from effective gross income

Effective gross income - operating expenses = net operating income (NOI)

Market value = NOI / Cap rate

Q8 common challenges that arise during the real estate valuation process

• incomplete and inaccurate data
• subjective judgments about property condition or quality
• changes in market conditions over time

Q9 Why is the capitalisation rate also referred to as the 'All Risks' rate?

• The capitalisation rate is a financial metric used in real estate investing to determine the value of income-producing properties
• It is calculated by dividing the net operating income (NOI) of a property by market value or purchase price
• Includes risks such as as
  • vacancy rates
  • maintenance costs
  • market fluctuations and
  • Other potential risks that could impact the properties income generation potential
• capitalisation rate represents the investors required rate of return, taking into account all the risks associated with the investment

Q10 technology and data analytics be used to enhance the real estate valuation process

• more accurate and timely data on market trends