Real Estate Valuation

Real Estate Valuation
By Bharat Trivedi
Unlike the stock market, where millions of shares of infosys or Reliance are traded every single day, there are relatively very few actual real estate transactions taking place in a particular local market. Every property transaction is unique in nature due to factors like location, size, shape, loading, zoning etc. This makes valuation of Real Estate property more judgmental and skillful.
Appraisers have to gather facts about the actual sales of commercial, residential or industrial property that have taken place within the last three to five years time span. Basically, the larger the parcel of land and building being appraised, the fewer will be the number of comparable transactions. Thus, there may be 10 sales of five acres parcels within two years, but only two transactions within five years of 200 acre parcels. If the assignment is to value a specific 20 acres parcel, it is difficult to draw meaningful conclusions from only two data points. What the appraiser does in that situation is to look at transactions of parcels ranging perhaps from 20 to 500 acres. The appraiser will look at the per acre price and see whether there is a correlation with parcel size.
The valuation so arrived at needs to be adjusted for time of sale. In a particular market area prices may be rising, slowly or quickly. However, in case of economic trouble, prices may be actually falling. So a sale that took place three years ago has to be adjusted in relation to both inflation and market direction.
Another adjustment will have to be made for zoning. To the extent that the potential use is limited by zoning restrictions, the price of any parcel of land will be affected. Thus if there are five transactions being analysed, the appraiser has to look at the zoning of each of the comparables and accordingly.
As another example of adjustment an appraiser looking at land sales will have to determine the effect of location on land value. The well-known popular phrase about real estate, “location, location, location” is still valid. This is perhaps the most important yet must difficult adjustment that has to be made. How much of a premium attaches to interstate highway access for petroleum retail outlet? Is proximity to a railroad siding an asset (for a warehouse) or a liability (for a residential development)?
The fact is that there is no standardized approach to these issues. Every parcel of Real Estate property is different. Every real property valuation is unique. All an appraiser can do is apply standard techniques to the actual situation knowing what questions to ask and how to develop the data is half the solution. Understanding the answers and drawing meaningful conclusions is the other half. The first can be taught, the latter only comes from knowledge of finance, economics, transactions, knowledge of various property related business and rich database.
American business spend almost $1 billion annually to determine the value of all types of assets. In the current flood of mergers and acquisitions, seizure & disposal of non performing assets, investment by fund managers in Asset Reconstruction Company (ARC) or future investment in Real Estate Mutual Funds, it is absolutely necessary and critical to know the most reliable and accurate value or Real Estate property. A misjudgment in valuation may create huge Non-performing Assets within ARCs and other financial institutions, which will in turn may make them sick.
There are no rules that guarantee a realistic valuation and depending upon the purpose of valuation, widely widely divergent valuations can be given. There is always a risk in an appraisal, but knowledge of economics, finance, town planning, transaction and ongoing research on property matters can substantially lower that risk. Moreover, additional knowledge and understanding of modern businesses like Multiplexes, Businesses Outsourcing Process (BPOs), IT Enabled Services, Call Centers, Hospitality and Health Sectors will certainly add a lot of value to the valuation process.