This is to inform you, so that you may think from the eyes of an appraiser. Just as an appraiser needs to know the problem or need associated with a job, so should the investor think about a purpose for the subject property. What do you expect to do with your investment? If you buy real estate for the long term, maybe you can afford to pay a little more, especially if that property has some unique value.
Some of the factors that you must consider, before you make the final and purchase of the land, are:
- Physical Value:
- Valuation of land, independent of improvements
- Replacement cost of the improvements.
- Depreciation of the improvement based on age and physical condition, also, functional and economic obsolescence.
- Earning Value (Income):
- Capitalization of net income.
- Goodwill value of an established location.
- Effects of supply and demand:
- Number of similar land/plots recently sold.
- Number of similar plots in the market.
- Advantages of good decision and arrangements.
- Harmony with surrounding improvements.
- Any known demand for similar properties.
- Any evident scarcity of similar properties.
- Values that exist in the mind of the buyer:
- General appearance of land and improvements.
- Advantages of good arrangement and design.
- Harmony with surrounding improvements.
- Peculiarities in design (advantages or detriments)
- Sentiment in buyer.
- Social advantages of neighborhood.
- Suitability of improvements to the Land and Location:
- Whether improvements are too large and costly or too small and cheap for location and land.
- Whether land might be used for something more profitable.
- Apparent trend of neighborhood development and future possibilities.
- Extent to which district is developed and possibly changed.
Appraisers use three basic methods of estimating fair market value: the cost approach, market approach, and income approach. The cost approach is based on the depreciated replacement cost of improvements, plus the market value of the site. The market approach uses the sales price of similar properties that have been recently sold to determine value. And the income approach bases value on the property’s anticipated future net income. The three difference properties approaches provide a framework for evaluating different properties.
The cost approach is practical if you have a building that has just been built, because you know the value of land and the cost of construction and can separate them. If that building is the highest and best use of land, then the cost approach can, with some degree of accuracy, determine the property’s fair market value.
Generally speaking, though the cost approach is the weakest of the three approaches. Excepting new developments, how can you value a piece of land independent of the improvements? The improvement, or actual building, has a direct bearing on the value of the land. Since there is now measure in the market for comparisons, the only thing you can do is determine the depreciated replacement cost of the improvement. sometimes the cost approach is the only method you can use if you are valuing a school, government building, church, or specialist industrial commercial property.
The market approach, generally employed by buyer’s and the realtors for single family residences, apartments complexes, commercial properties and general-purpose industrial properties, analyses the property in relation to comparable sales that occur in surrounding area. The only effective way of determining market value of single-family residences is by analyzing comparable sales.
Because of this, the market approach requires adjustments for the land and building’s size, location, age, setting, and a host of other factors, including the unique circumstances and terms of sales that is comparable. The seller might have increased the price to get better terms or might have been motivated to sell for less for personal reasons. You can never be sure.
The income approach derives an income stream from any type of property that yields a regular flow of money, such as an apartment building, hotel, office building, restaurant or business, shopping center, or leased industrial building. The question becomes, how much net income can you get from it? The net income is then capitalized into value using capitalization rate commensurate with market condition.
The income approach is generally, reliable when appraising large income-producing complexes, such as office building, shopping centers, and the like. The income approach is generally unreliable when appraising duplexes, triplexes, and small income-producing buildings.
The fundamental reason for using the three approaches is that they bracket value, leaving the appraiser to use his or her expertise and best judgment in correlating one final estimate of market value. In addition, a market demand analysis should be, made to estimate present and future demand for the subject land. As a buyer, you would want to pay fair market value or less. But when you start to consider what a given land will do over a longer period of time and what will be worth after 20 years, current values become irrelevant.
A person with foresight has to be sure not to overpay for a land, but at the same time, not let a good opportunity slip away, because the land is theoretically overpriced.
In the final analysis, you should pay the present worth of contemplated future benefits, in which case you should be prepared to pay more than market value. If you are right in you analysis, it doesn’t make any difference.
There’s no way to make an exact forecast. The only thing you can be assured of is that if you buy in an area with growth potential, there will continue to be increase in land values because growth in a capitalistic economy cannot exist without inflation. You can also be assured that there will be dips in the economy, but overall trend will be inevitably be up. No doubt about it. Think how empty the term millionaire is becoming! It takes several million rupees cash in the bank, to be on a par with simple millionaire of 20 years ago.
Thus, knowledge effects your decision. Lack of which, will lead you to loss.