I often have to assist my clients in understanding the value of the property in a transaction. The questions come in various guises; "is it good value", "why so expensive", "what should I ask?", etc. We're all afraid of paying too much or selling for too little, but how the heck do we know?
Any appraiser will tell you that they use three different forms of valuation to arrive at a market value, and they aim for a value that represents the highest and best use of the property. The Appraiser uses The Cost Approach, Sales Comparison Approach, and the Income Approach, which, in simple terms mean: 1. determine the cost by adding the land value and the depreciated cost to replace an existing building, 2. find nearby properties of similar makeup with recent sales and by allowing for differences arrive at a value, 3. determine the value based on what revenue can be generated.
The Appraiser will develop a composite of the values to arrive at a fair market value for the property, but how does this work for the Buyer and Seller and what should they understand about value?
One of the most important things to understand about your property as the Seller is who you expect to buy it. For example apartment buildings are purchased by investors who wish to use them for cash flow. They frequently want to improve the property somewhat to increase the cash flow too, but they don't really care about the comparison value or the cost to replace it. The Buyer just wants to make sure they have a good return on their investment. A term used commonly is capitalization rate or just cap rate. This can be used to infer a value based on the location and the net operating income of the property.
Land on the other hand may have the purchaser thinking in terms of location, zoning, and revenue. Ultimately whatever they build on the land must be able to generate a profit, so the land value will be capped in the mind of the buyer, but they will also need to consider the value as compared to other property at the location, and the costs to develop. Rezoning, environmental studies, soil preparation, impact fees etc. all affect the amount that a buyer is willing to pay, so a Seller needs to understand these items and if possible make some improvements prior to sale, making the land more valuable.
Fully understanding the value can be quite complex, but it is in the interest of the Seller to be as fully conversant as possible with the factors affecting their value and to mitigate them in whatever ways possible. The Buyer of course would love to work with a poorly informed Seller. The more the buyer understands about due diligence the better, and the better informed they are the more chance they have of making an informed purchase and not falling into the many pitfalls that await the uninitiated.
At the Cross Team we aim to make your sale or purchase the best it can be and we have a team of specialists that you can consult with on all aspects of the process.
Thank you for visiting the Cross Team website today. We would be pleased to help with any inquiries you may have. For more information, please fill out the boxes below, and we will respond within one business day.