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3 Most Commonly Used Appraisal Techniques
Monday, April 9, 2018

The primary purpose of a well structured and efficient appraisal system is to achieve and better understand the information required for making particular real estate investment decisions consuming both capital and current costs. This project based evaluation provides the company with the feasibility of purchasing or investing in a particular real estate project according to various market and economic trends.

Most real estate dealerships prefer to outsource the appraisal process for several reasons. Some believe that an outsourced appraisal would not only be cheaper as they don’t have to hire full time employees for the task, but will also aid in gaining unbiased analysis.

Some of these commonly used appraisal methods are given below:

1. Market Analysis

Before making the decision on investing in real estate, the first thing every investor needs to do is consider market analysis. Mass appraisal firms study and analyze the market and deem it either a profitable investment or not.

Some of the important factors to take under consideration while performing market survey are the price trends and determine if there are any wide fluctuations observed in recent times. If the prices have been inconstant over a shorter period of time as compared to others, then the particular land investment could be a risky one.

2. Analytical Analysis

After analyzing the market, the appraising companies tend to execute a wide analytical survey to determine the profitability of the project investment in accordance to revenues and costs associated with the initial investment.

A common method here is the net present value or NPV technique which shows the possible costs and revenue ratio against an initial investment.

The higher NPV ratio shows higher profits, thus the better prospects, while a project generating a negative NPV is outright rejected as the streams of income are inadequate to recover the project cost. An advantage of this method is that it reveals the time value of money while a drawback being that it’s heavily dependent on cost of capital which mostly declines over increasing discount rate.

3. Financial Analysis

As real estate investments are some of the biggest investments a person or a company makes in their time span, taking even the minute financial details is necessary to gain a clear picture on how much the investment is suitable in that specific scenario.

The mass appraisal takes into account both fixed assets and needed working capital. When analyzing fixed assets like land and buildings, the expenses studied are mostly related to depreciation and the life of the project. The expenses incurred through any remodeling and reconstruction required are also identified and tabulated.

Apart from examining the expenses, the working capital is also analyzed, that is, how the current assets fair against the liabilities. This means the firm studies the project to determine how much income it would gain against the loans and equity compromised.

As real estate is a long term investment, it is always recommended to trust a reputed and authentic mass appraisal firm for accurate and unbiased analysis.



 
 
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