Real Estate Appraisal and Property Inspection (1 of 3)

This is an important article about real estate appraisal.

A real estate appraisal is an independent opinion to estimate a property's market value, not to determine its price.

A real estate appraisal is usually performed by a professional expert who relies on scientific principles and various methods. The resulting opinion is impartial and independent, in favor of the property, not in favor of any of the parties involved in the real estate transaction (seller, buyer, lender, or borrower). This opinion is based on a specific fee or a specific percentage agreed upon according to established professional standards.

Real estate appraisal is a specialized and independent profession in its own right within the real estate sector and plays a distinct and key role, particularly in the process of borrowing from financial institutions.

On the other hand, a professional real estate broker is not a real estate appraiser, but he must be familiar with the general principles of this profession so that he can explain it to clients, explain the real estate market, and provide the appraiser with any information he knows to facilitate his work and prepare his final report.

A specialized real estate appraiser relies on several publicly visible and non-public data to prepare a detailed report to estimate the market value of a property, including: the type of property (residential or commercial), the property's location (the area and surrounding streets), the property's area (and number of rooms), the quality of the property's location, and the level of interior and exterior finishes (if built).

The non-visible data that play an important role in evaluating a property include: the condition of the property's supply, the scarcity or abundance of properties offered on the market with the same specifications, the property's function (i.e., the intended purpose of the property (apartment, office), the possibility of transferring ownership (i.e., the ease or difficulty of transferring ownership, the cost of converting its function), and other structural elements, for example, that the property requires to prepare it for use or construction, and the financial cost of doing so.

Thus, the goal of the real estate appraiser's report is to determine the property's market value, i.e., the fairest price that can be obtained in a real estate exchange process in:

1. A free, transparent, and competitive market.

2. All parties to a real estate exchange (seller and buyer) are free, adult, and rational individuals, fully aware of all the details of the exchange, and are under no compulsion to carry it out.

3. The necessary time is available to conduct the exchange.

4. In exchange for a sum of money.

5. There are no unusual, unnatural, or exceptional factors in the real estate exchange process.

The market price of the property is the actual price at which the property was sold. It may be less or more than the appraisal value, depending on real estate market conditions and the desires and circumstances of the parties to the real estate exchange.

Basic Methods of Real Estate Valuation

A professional appraiser, accredited by the relevant authorities and holding the necessary certifications and qualifications for valuation work, relies on the size and strength of the real estate company they work for and their practical and professional approach to valuation activities. In any case, a professional appraiser generally relies on three basic methods for valuing a property:

A. The method of comparing real estate sales in the market.

B. The cost method (for a similar property).

C. The income method.

The appraiser uses any of these three methods depending on the type of property to be appraised, whether residential, commercial, cultural, or governmental. They may need to combine two or three methods to provide an independent report supported by the necessary figures and parameters for the property appraisal.

We will provide a brief explanation of each of the three methods, which does not fully reflect the method, its literal approach, documentation style, and information structure.

Sales Comparison Method

This method is used specifically to appraise residential properties, such as houses and apartments, to determine the sale value. The professional real estate appraiser studies several factors affecting the property and their importance:

A. The property's location on a main street, side street, commercial street, public street, or private street, etc.

B. The property's condition, age of the building, its conditions, and its benefits.

C. The property's specifications, area, and level of interior and exterior finishing.

D. The history of sales transactions plays an indirect role.

E. Local selling conditions, if any, whether natural or forced, are indirect factors whose impact on the property appraisal varies.

F- Market conditions, supply and demand.

All steps aim to reach a fair market price for the property that reflects honesty, integrity, and professionalism in the approach and method.

By Eng. Abdul Moneim bin Muhammad Niazi Murad

Cost Calculation:

In this method, the professional appraiser relies on determining the rebuilding price of a similar property at the current time of the appraisal. He addresses several key points, the most important of which are:

A- Evaluating the land's price as if it were devoid of construction to determine its best use.

B- Evaluating the current construction cost. The appraiser relies on the figures of local contractors and engineers working in the construction sector.

C- Evaluating depreciation, i.e., determining the factors that affect the building's value based on its age, maintenance costs, and the need for simple or complex repairs. He also identifies internal and external physical and functional factors that may reduce or increase the building's value to determine its financial value.

The Income-Based Valuation Method:

This method relies on calculating the cash flow generated from renting income-generating properties, whether for residential rentals, commercial offices, shops, or markets. This percentage of cash flow is then calculated based on the property price, known as the Cap Rate. This percentage varies between 5, 7, 10, 15, and 20 percent, depending on the property's condition and income. It may be acceptable to one investor but not to another. Based on this percentage, the value of the property to be paid by the investor is determined.

This method relies on five key points:

1. Evaluating the total total income.

2. Determining the vacancy rate, i.e., determining and determining the rents for vacant units based on available natural statistics from the property or market.

3. Determining the total operating expenses for employees, services, consultants, and maintenance.

4. Determining the net income value, which is the net value of the investment return.

5. Calculating the income ratio.