Real estate valuation is necessary for a number of purposes such as financing, sales listing, investment analysis, property insurance, and taxation. Each of these purposes relies on estimating the value of real estate. In most cases, however, the most useful application of real estate valuation is to determine the asking price or the purchase price of a piece of property. This article will provide an introduction to the basic concepts and methods of real estate valuation, particularly as it pertains to sales.
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KEY TAKEAWAYS
- Valuing real estate is difficult since each property has unique features such as location, lot size, floor plan, and amenities.
- General real estate market concepts like supply and demand in a given region will certainly play into a particular property’s over-all value.
- Individual properties, however, must be subject to appraisal, using one of several methods, to ascertain a fair value.
Basic Valuation Concepts
The value of a property, in technical terms, is defined as the current worth of the future benefits that will be derived from owning the property in the future. There are a number of consumer goods that are quickly used when you buy them. However, many of the benefits of real estate are generally realized over a long period of time. Therefore, an estimate of a property’s value must take into consideration economic and social trends, as well as governmental controls or regulations and environmental conditions that may influence the four elements of value:
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Demand: is the desire or need to own a piece of property, supported by the ability to pay for it in a timely manner
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Utility: providing future owners with the ability to fulfill their desires and needs
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Scarcity: the presence of a finite number of competing properties
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Transferability: the ease with which ownership rights are transferred