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5 Different Types Of Value For Property
A real estate investor has to eventually come to terms with the various ways to interpret the value of a property.
That is unless… he treats this as a game which he want to lose at…
Understanding them is critical to profiting on the buy and sell.
While is is not necessary to profit the moment you purchase a house as one can eventually churn out a profit in the long haul if he knows what he’s doing, being able to count your profits from the moment you close on a purchase sure feels more thrilling.
In any case, here are the 5 types of property value to get accustomed to as an investor.
1) Appraised value
This is the value that people are most familiar with.
This figure is typically determined by an appraiser after conducting an assessment of the key details of a property and doing a basic inspection of it.
In a lot of cases, appraisers submit valuations taking into account feedback from third parties.
For example, if a bank wants to finance a transaction that was closed at $300,000, they might put pressure on appraisers to value the property as such since they are the ones paying the appraisers in the first place.
Having the appraised value match with the transaction price allows the lender to approve a loan at a desirable loan-to-value.
2) Property tax value
This is basically computed by the tax authorities which you can use as reference.
In order to tabulate the amount of property tax the owner is liable for, the IRS use their own internal equations to place a value on a specific property.
The cadastral can also play a part.
With this value, the property tax can be calculated. And demand for payment is sent via the postal service.
Property tax value on real estate can sometimes be erratic.
Buyers and sellers usually don’t use them for negotiation unless the number overwhelmingly gives them a leverage for argument in their favor.
3) Replacement value
A lot of homeowners or would-be homeowners will not have seen this term before.
But it is an important figure because it is used by insurance companies to determine the amount of to reimburse an owner should disaster strike. This would of course… also depend on the type of policies you subscribe to.
Take note that there can be varying replacement value placed on specific improvements and the whole real estate itself.
It can be a real pain in the neck to get insurers to pay out for claims. So do make it a point to convince them of a replacement value which is as high as possible.
If for example, you are buying a industrial property where total loss is a real risk, having a replacement value half of what you are paying will not give you any peace of mind at all.
4) Retail value
The retail value is the what a property is worth to an end user in dollar terms.
While builders might feel that a house is only worth as much as they are charging to build it, it can be worth a lot more to the eventual buyer who loves the seafront view, high floor, near his workplace, etc.
This is what the open market of consumers would be willing to pay for the specific property.
A point to consider here is that demand and supply can greatly affect the retail value of a house.
For example, if there are available homes for sale in the area aplenty, buyers know that they can easily switch their focus on another house if the price is too high.
Thus putting pressure on the retail value to go down.
Saying that, in most cases, retail value tend to be the highest among the different types of value.
5) Wholesale value
When real estate investors seek good value assets to acquire, they often make offers that are of wholesale value.
This is so that they can make a profit out of flipping it to the eventual homeowner.
End users seldom get to purchase apartments or houses at wholesale value as sellers are only willing to sell it to them at retail price.
However, when investors, flippers, developers, etc, are purchasing real estate, sellers understand that these buyers are buying to profit by putting the properties back on the market at some time in the future.
This is why they will be willing to sell at a wholesale price as long as they make a profit out of the transaction.
Do realize that sometimes, there can be a huge gap between retail and wholesale value.
The list above is anything by complete as there are various methods of valuing real estate in the industry. Some might even be methods that nobody have heard about.
But by being familiar with the different types of value listed above, you should be able to better contemplate buy and sell decisions so that bad financial mistakes are not made.