It is very important to evaluate real estate property before you finance any real estate deal. Real estate evaluation helps you establish or get a close estimate of the worth of the property and how much you are bound to get back in terms of profit once you purchase a piece of real estate. Evaluation is a systematic process that helps you determine the asking price and then make comparisons to find out the actual estimated value and the investment value as well. In this article you will learn the steps involved in real estate evaluation.
The first step is to carry out research about the property even before you have gone out to see it. You need to find every bit of information about this real estate property as well as related properties around it. Get information about past sales of properties in the area, market value of the said property and other properties in the neighbourhood. Identify comparable active, pending and closed sales for the last 6 months. This involves finding out what similar properties are on the market or were on the market within the last six months. This helps you evaluate the trends in the industry and lets you know what to expect.
You should then proceed to go and see the real estate item. At the property, take lots of pictures. Start with external pictures of the property, then of the street to determine the location and the general neighbourhood so you can evaluate the character and condition of the neighbourhood. You will then proceed to take pictures of the interior of the house. Take the living room, the kitchen, the bathrooms, bedrooms, the walls, the finishing. If there is a fire place, go ahead and take pictures of that as well.
You then need to take measurements of the property. Measure the exterior, measure the interior, measure the compound if there is one and record all this information. When measuring the interior, places like the living room kitchen and bedrooms are priority areas.
Drive around or walk around the neighborhood to get a feel of the environment around the property. This step is intended to help you understand what kind of neighborhood you are buying into. Location is key in real estate evaluation. Take pictures of other properties in the area as well for comparison purposes.
Using the photos you have taken of other similar properties in the area, find out the asking price for those properties. This will give a fair estimate of the real estate property you are evaluating. Also find out if the property value has gone up or down within the past year.
Begin to study the information gathered from the visit to the property. Upload the photos of the house, compare them with other properties with similar design and ascertain the price of the other properties. Make sure that your record all the observations you make as you study the information gathered.
Ascertain the legal description of the property. This will include information on the title deed for the property, giving location, size, ownership and the like. This ensures that you have the right real estate property being evaluated.
Write down a detailed report describing all that you have established. This will be the real estate evaluation report. It will detail the description of the neighborhood, the market description, the interior and exterior description, the possible improvements that may be needed, the current state of the property and the different price comparisons.
To come up with a final evaluation you will then use 3 different evaluation methods which are:
- Cost Approach: it involves evaluating the property according to the assumption that the property value is equal to its present cost. But you will also need to consider things like depreciation – old houses may depreciate even just after a month of evaluation.
- Comparative approach: this asserts that the value of the property is determined by similar properties around the neighborhood. The value of that real estate property is dependent on the past and present value of the properties in the area.
- Income approach: this real estate evaluation method is based on the amount of revenue the property is able to generate. You will need to identify its financial potential to be able to come up with its value.
The entire real estate evaluation depends on the correlation of these 3 methods to have a final value.