What Is Property Cost Evaluation?

Thank you to Real Canadian Property Management Solutions for providing the content for this post on Property Cost Evaluation!

Knowing how to calculate your Calgary property’s asking price is important. It can help you when it comes to financing, taxation, property insurance, and investment analysis.

The right price should be reflective of the current value of the market and not on the initial cost of the property or how much has been invested in it. Nowadays, for the most part, most buyers may be able to tell whether a property is priced properly or not, warns RCPMsolutions.ca.

Under-pricing a property may mean selling it for less than its worth. While overpricing it may mean having a difficult time finding a buyer. And, this may bring two questions to the mind of a potential buyer: why hasn’t the property sold yet and what could be wrong with the property?

If you are thinking of selling your property, then you need to price it correctly. This is what we will cover in this article.

Back to Basics

There are certain key terms in the property cost evaluation process that you need to understand.

Value

Have you ever wondered what the term ‘value’ really means when it comes to a property? Well, in technical terms, value refers to the existing worth of benefits arising as a result of owning a property.

Unlike consumer goods, benefits from a property take time to be realized. This is because a property’s value is affected by factors like government regulations, environmental conditions, and social and economic trends.

Value vs. Price and Cost

Do value, price, and cost mean the same thing? Not necessarily.

Here is an example to illustrate an instance when the value may not equate to price or cost:

Suppose the price of a home for sale is $100,000. However, after an inspection, a serious structural problem, say, a foundation issue is discovered. Do you still think the $100,000 value will hold up? Obviously not!

With that in mind, it’s clear that value and price are not always the same thing. The price tag for the home in our example above would definitely be lower.

Appraisal

A person who provides an appraisal is called an appraiser. Basically, an appraisal is the opinion on the value of a property at a certain time. The goal of an appraisal is to offer a professional opinion on the market value of a property.

Businesses, government agencies, property investors and mortgage companies commonly make use of appraisal reports.

Market Value

This is the price that your property would fetch in its respective market. Calculating the market value is necessary for a buyer looking to buy a property and for a seller thinking of listing their property.

Determining a Property’s Value

Generally speaking, appraisers use three basic approaches when determining the value of a property.

1.    Sales Comparison Approach

This approach is popular when it comes to determining single-family home values. It’s the foundation for the real estate professional’s CMA (Comparative Market Analysis). It uses sales prices as evidence of the value of similar properties.

There are certain qualities that a property must have in order for it to be deemed comparable. First and foremost, the property must have matching features to the subject property. Secondly, the property must have been sold under normal market conditions. Thirdly, it must have been sold in an open, competitive market within the last 12 months.

Appraisers usually use at least three properties as comparables.

2.    Cost Approach

The cost approach is another method an appraiser may use to develop an opinion of the property value. In this approach, the market price of a property equals to the cost of construction and the cost of land, less depreciation.

In summary, the cost approach surmises that the selling price of a property should be equal to the construction cost of a building.

It assumes that a buyer shouldn’t pay anything extra for an updated property other than the costs of building the property from start to finish. Appraisers generally use the following steps when using this approach.

The first thing an appraiser will do is assess the value of the land. Secondly, they will evaluate the prevailing construction costs. Next, they will calculate the amount of depreciation of any upgrades emanating from functional and economic deterioration and obsolescence. Lastly, the appraiser will deduct the depreciation from the costs of estimated construction.

3.    Income Capitalization Approach

This looks at two things: the net income of a property and the expected ROI. More often than not, appraisers will use this method to calculate the net income of an investment property.

The following are steps that appraisers use when using this approach to determine the value of a property.

• Estimate how much gross income the property generates per year
• Consider the effective gross income by factoring vacancies and rent collection losses
• Determine the net annual rental income
• Estimate the rate of return, or the capitalization rate

As you can see, there is really nothing mysterious about the term “property cost evaluation.” While usually conducted by professionals, understanding this basic concept can be beneficial to anyone involved in a real estate transaction.

Once again, we would like to thank Sheldon Dietz from Real Canadian Property Management Solutions for providing the content for this post on Property Cost Evaluation. To learn more about them, please visit their website here.

Thank you,

The Costen Insurance Team