As a real estate investor, property valuation is one of the most important–and most challenging–skills to master. You need to determine the value of the property, how much it will sell for and what kind of profit you can expect. While this can be difficult, making appropriate valuations will help you make better investment decisions and increase your overall profit margin.
To help you with this task, we asked Forbes Real Estate Council members to share their insights. Below, they share 16 factors you can use to determine the right price for your property.
Forbes Real Estate Council members detail strategies for properly pricing a property.
Photos courtesy of the individual members.
1. Migration Patterns And Median Income
There are several metrics investors can utilize when determining the best price point, the most obvious being comps and trending home sales price. A more sophisticated investor will expand their view to look at migration patterns, median household income and home price indices. The more data consumed when analyzing price points, the more informed the decision. – Ed Delgado, Five Star Global, LLC
2. Demand And Supply Analysis
I believe generally, and specifically in a changing market, demand and supply analysis is critical to making sound investment decisions. This includes the investor’s ability to understand trends and their impact on value, including changes in competing supply and end-user pricing and product expectations. This allows for more data-driven pricing and better economic performance overall. – Eve Moss, Clarendon
3. Off-Market And Public Sales
Calculate an accurate comparative market analysis. This would include off-market sales and public sales. I would also look at how quickly the properties have turned over because then you’ll know if your price is in line. You want to be tuned in to days on market as well as how much above or below the asking price the properties have sold for. – Rochelle Maize, Rochelle Maize Luxury Estates
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4. Realistic Outcomes
In today’s turbulent times, make conservative assumptions. Every deal has an infinite degree of theoretical outcomes, but only a handful of realistic outcomes. In a multi-family home, the delta between physical occupancy and economic occupancy has rarely ever been larger. In an office, the productivity per square foot has rarely been more unclear. In hospitality, one needs to value the asset per pound instead of revenue. – Syed Ali, Time Equities Inc
5. Cash Flow
As a baseline forecast, commercial income property value can be based on taking the trailing 12 months of cash flow leading up to the pandemic and setting it as the target cash flow in 24 months. From there you can make adjustments for vacancy lease-up and additional cash flow from renovations in a post-pandemic world. – Babak Ziai, BrandView Capital Partners
6. An Automated Valuation Model
An Automated Valuation Model (AVM) is a widely accepted, newly utilized technology that helps investors determine the best price for their properties with clean and verified data. We research and verify 25-35 data points through our top-ranked AVM. Today, banks and lenders implement AVM technology to appraise thousands of homes to increase valuation efficiency, quality, consistency and accuracy. – Jeff Cline, SVN | SFR Capital Fund I, LP
7. The Property’s Location
Location, location, location. Real estate is ever-evolving from the previous highest/best use to current market demand. Modeling various use scenarios to understand the near future value before investing is important. A retail center today may not create the highest value and adapting it to other uses, such as multi-family or mixed-use properties, may provide stronger returns. – Anjee Solanki, Colliers International
8. Cap Rate And Replacement Cost
It depends on your investment goals, risk tolerance and strategy. Most investors use cap rate to value properties. However, as investors, we take more of a replacement cost approach because we are value-add investors. Higher risk often equals higher return, so we’ve actually grown our portfolio and cash flow exponentially over the years compared to investors that only looked at current cap rate and NOI. – Catherine Kuo, Elite Homes | Christie’s International Real Estate
9. Economic Occupancy
Economic occupancy is a key indicator of asset value in relation to comparable properties in a market. In multi-family homes, for example, it’s not enough to look at occupancy numbers. It’s critical to also look at delinquency and bad turn costs that bring down values. – Ellen Calmas, Neighborhood Pay Services / NPS Rent Assurance
10. Physical Conditions And Past Performance
Perform a formal due diligence exercise that includes physical conditions, demographics and past performance. It will provide costs associated with repairs and maintenance, the potential for its use in its location and what can be expected as a return on investment. – Peter Ferzan, Ferzan Company LLC
11. Your Long-Term Goals
In any business, whether it’s a pharmacy or real estate, you make your money when you buy. We have no clue what the future holds. Even though prices have appreciated for three thousand years of recorded history, we still don’t know what tomorrow brings. Determining the “right price” depends on what you’re going to do with it. Flip? Wholesale? Hold? Each strategy presents its own formula. – Stuart Gethner, Phelps Capital & Consulting, Inc.
12. A Holistic View Of What’s Possible
Take a holistic view of what’s possible as the highest and best use of the land as if it were vacant. Recently, we submitted a package to an investor client for an off-market, single-family teardown. At first glance, it wasn’t attractive when reviewing comps. However, this one parcel allowed for a three parcel subdivide to build new or build a 16-unit apartment building. Best ROI they’d seen in years. – Sheryl Houck, eXp Realty LLC
13. Rent Yield
While there is no “one” thing a real estate investor can rely on to value a property, liquidity risk is a primary concern for most investors in the current environment. Flipping and resale strategies take time. Valuations based on what a property can rent for today in its current condition will provide a floor to better estimate the purchase price and mitigate risk. – Min Alexander, Auction.com
14. Audited History Of Revenue
Ask the seller for an audited history of the actual expenses and income over two years. Most times, the seller or his broker will look to “window dress” the financials, making the projected Net Operating Income look better. It’s easy to negotiate when you are armed with actual data. Without it, you are likely overpaying. – Nathan Anderson, NAI Heartland
15. Average Capitalization Rate
An investor needs to know the average capitalization rate of the area they are looking to buy in. If the rate of return of the subject property is greater than the average and it is in an area with good upside potential, then you know that it will be a solid investment. Also, while examining the comps, make sure the trend in the area is on an upward trajectory to minimize risk. – Elena Smirnova, Douglas Elliman Real Estate
16. Macro And Micro Trends
First, evaluate macro and micro trends from leading sources specific to your asset profile. Second, dive into the data. Due to investor demand, among other metrics, we forecast accelerated appreciation in destination-oriented markets and expect a new asset class to emerge. The key is to reduce your downside risk while still taking big (calculated) swings with upside. Data can help you do that. – Alex Allison, D. Alexander