The Art & Science of Property Valuation

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The Art & Science of Property Valuation

It is no secret that sellers want to sell high and buyers want to buy low. But they often arrive at the negotiating table with very different ideas on price. A fair and objective property valuation can help buyers and sellers find common ground and streamline the negotiation process.

In the end, the property is worth what a buyer is willing to pay. But to help both buyers and sellers achieve their goals, both should have a fair and objective estimate of property value. Unfortunately, even objective estimates are still estimates, and there is no way to assure 100% accuracy:

* Appraisals performed by a certified appraiser are not 100 percent accurate.

* CMA's (Comparable Market Analysis) and BPOs (Broker Price Opinions) performed by a licensed broker or agent are not 100 percent accurate.

* AVM (Automated Valuation Model) technology is not 100 percent accurate.

All these methods, when properly executed, can provide a good indication of value. Estimating value is a combination of art and science. Regardless of how scientific the approach, the actual sale price is subject to the unique variables of each property transaction: property condition, upgrades, current market conditions, circumstances of the sale and individual tastes.

For property owners, pricing correctly is a key to a successful sale. Under-pricing can result in a fast sale, but carries the risk of leaving money on the table. Sellers who price too high may find their properties lingering on the market, and statistics show that values can erode at a rate of about 1.) 5 percent per month. Longer sales also increase the likelihood of a "distressed sale" when sellers become frustrated or encounter difficult financial circumstances.

Likewise, buyers should avoid emotional purchases. Overpaying because of "falling in love" with a home is common. Homekeys' ValueKey Technology can help establish an objective, unemotional baseline for buyers and sellers so distressed sales and emotional purchases become the exception, not the rule.

The science of AVMs

To determine a good baseline value for a property, use Homekeys to search thousands of property records for comparable sales or "comps." Homekeys' ValueKey tool uses advanced statistical models and proprietary algorithms and formulas to find the best comparable properties available. In addition to property characteristics, the system evaluates how recent comparable sales are and how close properties are from the property being evaluated. Once a base property value estimate is determined, it's time to check active listings to see what similar properties are selling for. ValueKey searches both owner- and broker-offered active listings to find the most comparable properties available.

The art of AVMs

The art portion of estimating value begins with understanding how comparable sales and active listings compare to the property being evaluated. Since they are nearby, it's a good idea to drive by comparable sales and listed properties to see how they compare. To help you stay organized, you may want to use a buyer checklist when visiting properties.

After researching comparable sales and active listings, it's time for the personal touch. Sellers know their own property and neighborhood better than anyone, so they are able to adjust base values according to individual property characteristics. Buyers can make similar adjustments as they visit properties to help formulate an asking price.

Depending on your research, a "market adjustment" may be warranted. If active listings are priced higher than your base estimated value, an upward adjustment may be appropriate. If prices are lower, a downward adjustment might be in order.

Finally, ValueKey enables buyers and sellers to make other value adjustments based on individual property characteristics and condition. Based on a seller's knowledge or a buyer's research, appropriate value adjustments can help both parties arrive at a fair selling price.

And though no property valuation system is perfect, AVMs can provide objective valuation estimates quickly and inexpensively, and the technology is improving all the time. As AVM technology continues to evolve and improve, it may prove to be a key to less-stress, more enlightened real estate transactions in the future.

Learn more at http://www.homekeys.net

About the Author

Manuel Iroala is President and CEO of Homekeys. Charles Warnock is Marketing Communications Manager at Homekeys, a South-Florida based real estate and technology company. This article can also be found at www.homekeys.net

Comments

Proactive M 17.08.2007. 10:23

Home assessed value - will it go up after the sale? I am planning on buying a home which has a much lower assesed value than what I am planning to pay for it. The appraisal however is greater than the selling price by about 5k. I am worried that the taxes are going to go up after the sale because someone told me that after a sale is made the assessed value is matched up to the sale price. This is Travis county in Austin Texas. Any insight would be most appreciated - thank you for your time!

Proactive M

Admin 17.08.2007. 10:23

That's exactly what will happen. It's standard practice in TX.

TX state law requires that the assessed value for tax purposes equals the fair market value of the property. Valuations are adjusted annually using statistical analysis and about every 5 years or so with a more formal appraisal process. Appraisal is more art than science and errors do creep into the system over time. The best valuation of a property is what it sells for in an arms-length transaction so virtually every appraisal district in TX will adjust the assessed value to the most recent sales price when a property changes hands.

To more accurately estimate what your taxes will be, divide the current taxes by the assessed value and apply that percentage to the sales price. You'll be within pocket change of your tax bill next year.

Admin

Akbar A 27.02.2008. 10:13

write the procedure of valuation of goodwill.? Array

Akbar A

Admin 27.02.2008. 10:13

Valuation concepts and procedure
Valuation is an art more than a science and is an interdisciplinary study drawing upon law, economics, finance, accounting, and investment. It is rash to attempt any valuation adopting so called industry/sector norms in ignorance of the fundamental theoretical framework of valuation.
Valuation procedure is, essentially, a bringing together of the economic concept of value and the legal concept of property. The cardinal rule of commercial valuation is that the value of something cannot be stated in the abstract; all that can be stated is the value of a thing in a particular place, at a particular time, in particular circumstances. We adhere to this and the questions 'valuable to whom?' and 'important for what purpose?' must always be asked before a valuation can be carried out. This rule is particularly significant as far as the valuation of intellectual property rights is concerned. More often than not in commercial negotiations, there will only be one or two interested parties, and the value to each of them will depend upon their circumstances. Failure to take these circumstances and those of the owner into account will result in a meaningless valuation.
There are four main value concepts, namely, owner value, market value, tax value and fair value. Owner value often determines the price in negotiated deals and is often led by a proprietor's view of value if he were deprived of the property. The basis of market value is the assumption that if comparable property has fetched a certain price, then the subject property will realise a price something near to it. The fair value concept in essence, is the desire to be equitable to both parties. It recognises that the transaction is not in the open market and that vendor and purchaser have been brought together in a legally binding manner. Tax valuation has been the subject of case law since the turn of the century and is an esoteric practice. There are quasi-concepts of value that impinge upon each of these main areas, namely, investment value, liquidation value, and going concern value.
Valuation methods
Acceptable methods of the valuation of identifiable intangible assets and intellectual property fall into three broad categories. They are either
?market based
?cost based
?based on estimates of future economic benefits
In an ideal situation, an independent expert will always prefer to determine a market value by reference to comparable market transactions. This is difficult enough when valuing assets such as bricks and mortar because it is never possible to find a transaction that is exactly comparable. In valuing an item of intellectual property, the search for a comparable market transaction becomes almost futile. This is not only due to lack of compatibility, but also because intellectual property is generally not developed to be sold, and many sales are usually only a small part of a larger transaction and details are kept confidential. There are other impediments that limit the usefulness of this method, namely special purchasers, different negotiating skills, and the distorting effects of the peaks and troughs of economic cycles. In a nutshell, this summarises my objection to such statements as 'this is rule of thumb in the sector'.
Cost based methodologies, e.g. the cost to create or the cost to replace, assume that there is some relationship between cost and value, and the approach has very little to commend itself other than ease of use. The method ignores changes in the time value of money and ignores maintenance.
The method of valuation flowing from an estimate of future economic benefits can be broken down to four often-overlapping limbs; capitalisation of historic profits, gross profit differential methods, excess profits methods, the relief from royalty method and discounted cash flow analysis.
While the capitalisation process recognises some of the factors which should be considered, it has major shortcomings, mostly associated with historic earning capability. The gross profit differential methods are often associated with trade mark and brand valuation. The excess profits method is associated with earnings capability in order to induce investment and, while theoretically relying upon future economic benefits from the use of the asset, the method has difficulty in adjusting to alternative uses of the asset. Relief from royalty considers what the purchaser could afford, or would be willing to pay for the licence. The royalty stream is then capitalised reflecting the risk and return relationship of investing in the asset.

Admin

Dana 17.02.2012. 07:01

What can I do to be useful to this country? I'm one of the millions of people in this country who spent their youth pursuing an utterly useless degree in Fiction Writing. While I'm passionate and talented at it, I honestly feel as though a large part of why this country is going down the tube is because we don't make things. I realize that this is a complicated issue and has to do with a complex web of events that included unionization (I'm pro-union, btw) and globalization and environmental regulations and trade and corruption and taxes, but still I thought I'd like to try to be a part of the solution from the bottom up. I didn't want to be one of millions of useless English majors. So I tried getting a really basic manual labor job-- I'm a woman, but I'm not built small and I can meet all the basic requirements. I didn't ask for a huge salary. I'm not married. I also tried getting a job as a fruit picker/migrant worker. I didn't get either type of job, because I'm a little intellectual artist kid and from their perspective, I probably look like more trouble than I'm worth.

I'd go back to school for engineering or environmental science but I'm not made of money and I didn't get into one of those fields in the first place because the fact of the matter is, I'm just not science-minded. I get abstract concepts like theoretical physics, but there aren't many practical jobs in that field since basically it's all thinking and even if there were, I fail in the mathematics.

I have excellent communication skills but I don't want to be a politician. Again, that would just be being part of the problem. So what do I do that would actually make me someone useful? Teaching? Do we need more teachers? Community organizing? What do we need that doesn't require an immense amount of money or an extremely scientific education? Seriously. I'm willing to make sacrifices, I'm willing to work hard. I just don't know what to do and unfortunately neither the hyper-academic Left nor the rhetorical and close-minded Right seem to have any kind of an answer.

Dana

Admin 17.02.2012. 07:01

Dana, I found a similar problem after an education in arts.

One of the basic lessons of economics is to beware of big aggregate concepts.

For example, the early economists cracked their brains trying to solve "the paradox of value". Why is bread - which is the staff of life - cheaper than diamonds - which are a mere frippery? Long story short, the reason for the paradox is because they were creating aggregate categories that did not correspond to any real category of human action. No-one is ever confronted with the choice of buying the category "bread" (i.e. all bread as a unit), with "diamonds". In reality, the situation is always that a certain person chooses to buy a certain unit of bread at a certain time for a certain purpose, and it is these individual acts of valuation which give rise to the price of bread and diamonds, not any overall aggregate valuation. In fact, the question as posed involved the fallacy of conceptual realism: treating as real, what was really only an abstract aggregate concept.

Similarly, there is no monolithic solidary unit of humanity or of human value called "the country" nor do "we" - all the people in the country - have solidary interests nor similar values. What we actually have are tens of millions of people, each with their own values and purposes and economic plan, co-operating with billions of other people, ditto. That's the reality you need to address.

"So what do I do that would actually make me someone useful?"
Anything that people *voluntarily* pay for proves that you are doing something useful. If this were not so, they wouldn't part with the money, would they? The solution isn't "making things" (ie manufacturing) per se. It's producing anything - in primary, secondary, or tertiary industry - that others voluntarily pay for. *That* is what contributes to society.

Taxation is, by law, a compulsory impost, a coerced taking. It is by definition not a voluntary payment. So all we know about taxation, axiomatically, is that the people paying it considered something else to be of higher value than what they thought the state was going to do with the property thus confiscated; otherwise no compulsion would have been necessary, would it?

"Do we need more teachers?"
There's a perfectly simple way to figure out what "we" [there's that conceptual fallacy again] need. "We" are willing to pay for it. Absent that consideration, there is no objective way of knowing; all opinions are utterly arbitrary and, in the case of state-provided services, violence-based.

So there's your answer. There is no need to ponder the question at an academic level. Do
a) whatever you like,
b) that others are willing to pay for.

How to figure out what that is, that's a different question. That's about your personal success journey.

You could try "How to get from where you Are to where you want to Be" be, by Jack Canfield. It gives practical advice on how to identify what you are trying to achieve and how to achieve it. Basically you
1. dream freely all the things you want to do and achieve in life
2. make prioritised goals to a time-frame
3. diarise action steps
4. take action daily
5. monitor and follow up.

Admin

Brokn 16.03.2008. 21:07

Tax help: How do we find out the fair market value of a house as of 1991? We are filing our Mothers final tax return, her house (purchased in 1949) was sold before she passed away. The IRS instruction book says that as a surviving spouse, to figure out the cost basis of her house, she can take the value of the house when my Father died (1991) less the selling price and adjustments/improvements as 1/2 and the other 1/2 would be the adjusted cost basis between the price they paid for their house and the price it was sold for.

Where/how would we now determine what the fair market value of the house was back in 1991 when my Father passed away?

There wasn't anything in the tax instructions back in 1991 indicating that a surviving spouse needed to get an appraisal at the time of death.

Knowing the value back to the date of my Father's death will make a tremendous difference in the amount of capitol gains taxes even with the 250000.00 exemption.

Brokn

Admin 16.03.2008. 21:07

This is going to be difficult to prove. You'll need to contact an experienced certified property appraiser in the local area of the home, preferably someone who has continuously been doing appraisals since well before 1991.

Property appraisals are more art than science under the best of situations and establishing property values that far back in history complicates the issue significantly. Accurate records of sales of comparable properties will be difficult to locate so you really want someone who has kept all of his or her records going back at least that far.

Make sure that the appraiser provides throrough documentation of their valuation along with full documentation of any comps used in reaching at their valuation. If the IRS challenges the valuation at audit it will be up to you to prove to the IRS that your valuation is correct.

Admin

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