Therefore, property owners end up having abnormally high expectations of the value of their properties and so tend to price them at prohibitively high prices that normally work to their detriment rather than to their advantage in the long term.
However, one can't really blame these property owners exclusively because to some extent, real property appraisers or valuers as they are sometimes called, also contribute to this problem in one way or another. When contracted to help value a piece of real property, they normally value these properties on the high end and hence contribute unknowingly to this trend of high property values.
Moreover, there seems to be no Uniformity and Consistency when it comes to property valuations in the Zambian real estate market and industry! That's why some financial lending institutions have ended up creating a section in their organizations that offer property valuation services to there clients to avoid inconsistencies in property valuations in the Zambian real estate property valuation industry.
But then even the entrance and participation of such financial lending institutions in the property valuation arena hasn't helped so much as to help with the problem of pricing properties highly!
And this therefore has left this matter of high pricing of properties to the Market Forces ONLY to help determine how much a piece of real property is really worth at any given moment in time especially when it comes to people who are trying to buy or invest in real estate using their own hard earned liquid cash rather than using borrowed money from the banks.
So, Are There Ways That Can Help A Buyer or Seller To Come Up With An Estimated and Fair Property Market Value or Price?
There are actually about Two FREE Ways that can help Anyone estimate or determine the value of a piece of real property without actually spending a dime or ngwee. And One other Paid Way or Method of calculating property values for those that have the money to spend!
These are as follows:
1. COMPARING THE PROPERTY'S SALES PRICE WITH THE F.M.V
However, this may not be an accurate way of determining property values, BUT it is a very good yardstick for verifying and establishing the F.M.V (Fair Market Value) of the subject property you're currently considering to buy or invest in - if you intend to pay for it using your own hard earned liquid cash other than borrowed money!!
So, dear blog reader and real estate investor, apply wisdom and shrewdness when valuing, buying and/or investing in real property. If you do not have past sales figures for the particular similar property you're currently looking at now, then get professional help from your real estate agent or other realtors. This information is normally available as "Comparable Sales Reports".
2. USING INCOME OR CASH-FLOW ANALYSIS TO HELP DETERMINE THE PROPERTY VALUE
Therefore, investors or people considering purchasing or investing in a certain piece of commercial property can use this Income or Cash-flow Analysis Method to help them determine or calculate the current value of the subject property they are currently looking at based on income earned from similar looking properties or the particular property's previous and/or projected next-year net operating income / cash-flow. They use what is popularly known in real estate circles as a "Cap Rate" (Capitalization Rate) to help find or calculate the value of a piece of commercial property they're interested in.
The formula for calculating a piece of commercial property's value is:
Value = NOI (Net Operating Income or Net Rental Income) divided by the Capitalization Rate of the Area.
So, How Do You Find The Figures To Use In The Above Formula?
Well, You find the figures to use in the above formula by using another similar commercial property's operating income and it's recently sold price in order to first find the Cap Rate for the area and then apply it to the property in question to determine it's current value based on income.
1. Research the recently sold price of an income generating property in a certain area of your choice, such as an office building or Shopping Mall.
E.g : A Twenty units rental Office Building just recently sold for $300,000
2. For that same Twenty units rental office building, determine or find out the net operating income, or the net rental income realized by the owners of the same building.
E.g: The rental income after expenses (net) is $24,000
3. Divide that net operating income you find by the sale price to first get or find it's Cap Rate.
E.g: $24,000 / $300,000 = .08 or 8% (The Capitalization Rate)
4. Follow the above mentioned formula for calculating or determining the estimated current market value of the commercial property you're currently interested in or wish to buy or invest in.
E.g $24,000 (Net Operating Income) ÷ 8% (0.08) Cap Rate = $300,000 (The Current Estimated Value of the Commercial Property you're interested in!!
Also, a commercial property's Cap Rate can be found by dividing the particular property's projected next-year net operating income by its value. Such that a property's net operating income, or NOI, equals gross rental income minus operating expenses including vacancy losses.
For example, a commercial property with a projected next-year net operating income of $10,000 (NOI) and a $100,000 market value has a 10 percent Cap Rate.
So that the property's current Market Value = $10,000 ÷ 0.10% (10%) which is actually $100,000 confirming the validity of the above mentioned formula for calculating a particular piece of real property's current market value!!
Therefore, if you happen to have any questions, concerns, worries, uncertainties etc about this method or way of calculating real property values, then please consult your real estate agent or realtor for help.
And the last way or method of determining property values is:
3. GETTING AN OFFICIAL APPRAISAL OR VALUATION REPORT
Getting an Official or Certified Appraisal or Valuation Report can provide you as a buyer or seller of real property with the most crucial information you need aside from the other two free ways or methods of calculating property values and help you establish the range for your negotiations with the various sellers or buyers whatever the case might be.
And if you're trying to buy a piece of real property using mortgage financing from one of the various financial lending institutions, then you have no choice but to use this very way of obtaining property values because this is the only way these institutions accept before they even consider processing your application.
Should you therefore decide to get an appraisal, then please have it done by an appraiser who is recognized by conservative financial lending institutions to at least make sure that the estimated value you're provided with is conservative in both your own observation and that of the average financial lending institutions. Sellers won't probably pay for an appraisal and then sell the property to you for much less than the appraisal itself. So, it is recommended that you as a buyer make your offer subject to an appraisal of the property if that is fine with both parties to the deal or transaction at hand. In this way, you set the price in advance before the appraisal of the property, and if the appraisal comes in at too low or too higher a price, then you'll be able to renegotiate with the respective seller.
The only challenge however that this method of calculating or determining property values has, is that it can come at a seemingly high cost to both seller and buyer whichever the case might be but it is one of the best ways of determining property values except that in most cases, the values appear to be too prohibitively high compared to the Fair Market Value obtaining at a particular point in time in the market!
However, this can be a subject of negotiations by the various concerned parties to the deal at hand!
So, hope you got something of value out of today's blog post. Talk to you soon.
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