Assessment of a real estate
The expert assessments of real estates are usually used for making investment decisions, sale of property, for receiving a credit and determination of the insurance value of a building. The three most common methods for assessment of real estates are: method of expenses, method of market analogy, and method of income.
Method of expenses
With this method the experts calculate the cost of constructing a similar building with current prices of materials and services. After that they add the amortization for the existence period of the building.
The other important element is market value of the plot on which the building stands. The market value is determined after comparison with the land prices in the same area in the recent months.
The assessment of the real estate through the method of expenses is calculated as a sum of the value of the amortized building and the market value of the plot.
Method of market analogy
This method is based on the principle of comparison, i.e. the assessed real estate costs as much as a property with the same construction quality, facilities, function, location, access, etc. It is applicable only if there is information available about deals with similar real estates.
Method of income
The main quantity, necessary for the calculation of the value of a real estate through the method of income, is the standard of capitalization. It is determined by the market, and indicates the level of development and liquidability of the market, as well as the risk of investment in the respective kind of real estates.
Depending on the fact if the real estate is being used by the owner, or it has been rented, two techniques can be applied – of the direct capitalization, and of the discounted money flows.
- Direct capitalization is applied when the assessed real estate is being used by its owner. The potential annual income from renting of the property is calculated. After that the expenses for the maintenance of the building are deducted, and the potential operative profit of the real estate is acquired. This profit is capitalized by means of the standard of capitalization for the respective kind of real estates.
- The discounted money flows are used as an assessment technique in cases when the object of the assessment is a building that offers rented spaces. Usually, ten-year-long prognoses are made for the future operative profit of the real estate. After discounting with the proper standard of capitalization, the value of the building is acquired through the method of income.
Fair market value
After assessing the real estate through the three methods, the assessment expert must calculate the fair market value of the property. This can be done by means of choosing the value, acquired through one of the methods, or by calculating the average value of all the methods used for the assessment.