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Property Value

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Property Value

The term property value generally refers to the price at which a property can be sold in the open market under normal marketing conditions and normal transaction circumstances that do not exert any undue pressures to or influence in any special way either the seller or the buyer. This is what is typically referred to as the market value of a property

Figuring out the value of a typical house, it is easier as it can be done by finding recent sales of comparable houses in its neighborhood. The comparable sales can give a good evidence of value for a particular house, but one needs to be careful to identify all differences between the house that is valued (in terms of quality of construction, design, attractiveness, etc.) and the comparables and make appropriate adjustments to derive an estimate of property value.

However, when it comes to commercial and income producing property, it is more difficult to estimate the true open-market value of the property. In the valuation of such properties we certainly need to look at comparable sales but that is not enough.

Income property is investment property, and investors are primarily interested in the income stream that they will receive from the property (its timing actually and magnitude), and whether that income stream and any potential increases in property value will give them a minimum acceptable return, taking into account all ownership expenses (including taxes) and the price they will pay to buy it. 

In this sense, for a property investor, the property value that is of interest is not the market value of a property but its investment value, that is, the value that will allow him to achieve a minimum required return given his/her reasonable expectations of the net income stream that the property under consideration will be producing over the expected investment horizon and capital gains. This investment value can be calculated using the discounted cash flow model, which takes into account the exact timing of future cash flows and the investor’s required rate of return.

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