SUBJECT: ESTIMATION AND VALUATION(18CV72)

TOPIC: TECHNIQUES OF REAL ESTATE VALUATION

CONTENT

• Real estate valuation

• Basic for valuation
• Valuation approach types
o income approach
o Cost approach
o Market comparison approach

• Role of valuation
 REAL ESTATE VALUATION
• Real estate valuation is a process that
determines the economic value of a real
estate investment.
• It helps in taking better financial and
investment decisions for the future business
projects and customer orders.
• The capitalization rate is a key metric for
valuing an income-producing property. Net
operating income (NOI) measures an income-
producing property's profitability before
adding costs for financing and taxes.
• The two key real estate valuation methods include
discounting future NOI and the gross income
multiplier model.
• It will further help in evaluating business finances,
sales, investments and more.
• Explain the role of property valuation for the
company.
 BASIC FOR VALUATION
• MARKET VALUE : Market value is the price an asset fetches in the market
and is commonly used to refer to market capitalization.
• AN ASSET SHOULD EXCHANGE : The idea that an asset’s value is an
approximate amount, rather than a fixed sum or actual price of sale.
• ON THE VALUATION DATE: Because of a given data the value is time-specific.
MARKET VALUE IMPORTANCE

• Transfer of Ownership
• Financing of property
• Taxation
• Compensation for eminent domain
• Insurance purposes
Different Approaches

• Income Approach :
To value income fetching marketable properties.
• Market Approach :
To value Non income fetching but marketable properties.
• Cost Approach:
To value Non income fetching and non-marketable property.
 INCOME APPROACH
• The income approach encompasses discounted cash flow, and direct
capitalization.
• The discounted cash flow approach estimates property values by
calculating the present value of expected future cash flows to the
owner.
• The analysis involves projections of annual operating cash flows for a
finite number of periods and a resale value at the end of that period.
 DIRECT CAPITALISATION
• The direct capitalization approach estimates the value of
an income-producing property by dividing the its net
operating income by a capitalization rate.
• This method is based on the relationship between the rate
of return an investor requires and the net income that a
property produces.
• It is used to estimate the value of income-producing
properties such as apartment complexes, office buildings,
and shopping centers.
• Net operating income (NOI) is a calculation used to
analyze the profitability of income-generating real estate
investments.
• NOI=all revenue from the property - all reasonably
necessary operating expenses.
The Main Steps in Income Capitalization method :

• To collect data from market and other sources like records of

Registrar of documents
• To inspect property to be valued
• To find out fair and maintainable gross rent receivable
• To deduct various permissible outgoings
• To select proper rate of capitalization by study of Real Estate
Market
• To find out applicability/Non applicability of Rent Control Act
• To capitalize net receivable income
The income capitalization approach formula is referred to as the IRV formula:

Property Market Value (V) =Net Operating Income (I) / Capitalization Rate (R)

• Example:
 Gross Income Multiplier (GIM)
• Rough measure of the value of an investment property.
• It is calculated by dividing the property's sale price by its gross annual rental
income.
• Investors shouldn't use the GIM as the sole valuation metric because it doesn't
take an income property's operating costs into account.
 COST APPROACH
▪ Property valuation is based on the cost of the
land and the construction of the property.
▪ For this approach, the value of a property is
equal to the cost of building a similar building
minus the depreciation.
▪ This is used in select-use properties such as
schools and churches. Mostly for income-
producing properties and rarely for residential
real estate.
▪ The cost approach method can also be used
on commercial real estate.
 MARKET COMPARISON APPROACH
• Also called Sales comparison approach.
• The sales comparison approach uses the market
data of sale prices to estimate the value of a real
estate property.
• Property valuation in this method is done by
comparing a property to other similar properties that
have been recently sold.
• Used in valuing single-family homes and land.
• The most important factors to consider when
selecting comparable are the size, comparable
features and location.
THE ROLE OF VALUATION
• Valuations add value to the investment decision-making process by
providing a third-party, unbiased, and informed estimate of what the
property would be likely to sell for in the open market.
• valuation is best estimate of the trading price of the building.
• Determines how much property taxes and property insurance to pay.
• Obtaining and maintaining financing.
• Helps to determine the price to buy, sell or merge a business.
THANK YOU