Real Estate Valuation : Sales Comparison Approach

Valuation is at the core of land investment without which no vital arranging is conceivable. In our two-section arrangement, we will introduce two fundamental valuation methods for investment purpose. Notwithstanding, before we make a plunge we start with a significant proviso. Any valuation ought to be used related to isolate neighborhood market analysis. As we will see, the supposition used in the valuation cycle relies critically upon this understanding of the commercial center. The central purpose of this piece is to give a quantitative approach to valuation that expands and supplements extra statistical surveying.

Basics of Valuation

Valuation is the assurance of the possible value any property ought to acquire a serious and open market under all conditions essential for reasonable deal. This infers: (a) Buyers and sellers are endeavouring towards getting the best deal, (b) Buyers are sellers are very much informed about the land market.

Reasons for Valuation

• Negotiation with seller:An exact and appropriate valuation is fundamental for the negotiation cycle with the seller
• Investment feasibility analysis : A key part of the contribute feasibility analysis is to acquire an appropriate valuation (in this manner a gauge of introductory investment vital)
• Debt financing: because a large portion of the land investment includes some form of debt financing. As an investor you ought to know about built up valuation methods so your valuation is predictable with that of the banks
• Other reasons: The other explanation behind valuation is for protection purposes and property charge evaluation.

Valuation Steps

• Physical and Legal identification: This is particularly significant in Indian market where the neighborhood variety of rules can make issues later on. So, this progression is a significant initial step. : See above
• Specify effective date of value estimation: See above

  Specify viable date of significant worth estimation: We all realize that economic situations are liquid, so every valuation has a lapse date connected to it. Additionally, a more drawn out valuation skyline needs to contemplate the obscure danger factors.

• Gather and analyze market data: This is the most significant part of valuation. All valuation depends on suppositions, and great valuation depends on presumptions that precisely mirror the truth of the commercial center. Case of market information incorporates lease information, opportunity rates, flexibly and demand factors, ingestion rate in the neighborhood and so on.
• Use valuation methods: Once furnished with suitable information, the time has come to wrench the valuation machine. The explanation we examine elective valuation methods because each will give a brief look at an alternate part of the intrinsic estimation of the property.

Valuation Method:

We consider two mainstream valuation methods that reflect various approaches to valuation. We expand every one of this approach and feature their quality and shortcoming. In the initial segment of the arrangement we will examine about the Sales comparison approach and the second and third part will cover the pay approach
Sales comparison approach

1. Methodology Overview: Simply, the basic reason of this approach is that the  that the estimation of a property ought to be intently tantamount to comparative properties  sold as of late. While it looks misleadingly straightforward, the watchword iscomparative properties.In certifiable it is now and then hard to concoct an example of sold properties which has precisely indistinguishable attributes, for this situation we do reasonable change with the end goal that the properties are equivalent to the property to be esteemed (our model underneath will make the instrument of modification understood).
2. Factors for defining Similarity: Following are few important factors of interest:
   • Closeness to Subject property: This is the most significant factor of consideration. Ideally the practically identical property ought to be close by or “practically” close (what we mean by “practically close” is that the properties might be geologically far yet comparative in practically; for example, two investment properties geologically separated yet in luxurious neighborhood, state Friend’s province and Vasant Kunj in New Delhi). Appropriate alteration should be accomplished for nearness if vital.
   • Date of Sale:The similar properties ought to have been sold in the ongoing past. In the event that it is further back previously, then one needs to join market value pattern to get a gauge of the current deal cost. For instance, if the property cost acknowledges at 3% per annum over the most recent two years and the property viable was sold 2 years in those days, we have to do a 6% positive value alteration for the purpose of comparison.
   • Age of property:If the equivalent property is more established than the subject then important limiting should be finished.
   • Construction quality :If there is a critical contrast in construction quality then a reasonable change should be done to represent this distinction.
   • Ancillary facilities:This incorporates other significant factors like number of floors, presence of elevator, aesthetic factors (vicinity to stop or stunning perspective and so on), and landscaping to name just not many. Here a few subjective decisions should be completed to acquire the practically identical property standard with the subject property. We emphasize that the above rundown is in no way, shape or form comprehensive and our recommendation is to set up the equivalent rundown dependent on the uniqueness of the property viable.
3. Derive the Value of the property : Commonly two methods are used for the valuation purpose which we quickly depict beneath.
   • Price per unit area adjustment:Here we modify the cost per unit region (state, square ft.) to represent contrast in “similarity” measurements alluded to above. In the wake of modifying the known cost per unit zone for practically identical properties we total this figure to infer the cost per unit territory for the subject property. A basic approach is to simply take the average of balanced cost per sq. ft for the practically identical properties. The last worth is then controlled by basically increasing the territory with the cost per unit region.
   • Rental Income to Sales price comparison: This approach is like Income Approach in soul which we will cover in subtleties in the second aspect of this arrangement. To give you a fast look, this approach totals the proportion of rental salary to sales cost of practically identical properties with reasonable modification dependent on “similarity” factors and apply the equivalent to the property under valuation.
4. Let’s Go to Valuation Lab: 

   We have presented a ton of idea above so we show the usage underneath dependent on Price per unit region change approach. We will examine about the suppositions as we come. In this model we think about the valuation of a shopping centre complex and consider three comparative buildings that were sold before. Note that the alteration factor is applied to the cost per net sq. footage. Crude cost per square ft. is inferred by just isolating the deal cost by net sq. footage (for example for property 2, it is 60 Crores/20,000= Rs. 30,000). As should be obvious from the top board of the tables given underneath the “similarity factors” (fields featured pink) are not actually indistinguishable, in this manner we have to do the pertinent change in accordance with infer the subject property cost per sq. ft.

   • Adjustment Assumptions: Fields featured pink are “similarity factor” suggested previously. In the event that there is distinction in these attributes, then appropriate changes are made to cost per sq. ft dependent on the accompanying suspicions:
     • Value thankfulness every year is 5%, accordingly a property sold 1 year back has a modification of +5%.
     • The subject property is in an awesome region, along these lines moving ceaselessly from it prompts a drop in valuation of the property (0.5% per km. separation)
     • More seasoned the property the lesser the worth, in this model we have used – 3% every year.
     • Construction quality alteration is possibly done if the similar property isn’t brilliant (the state of the property to be esteemed). Here property 3 is of average quality so we expect a 5% modification for that.

When the alteration percentages are registered, we total all the changes by adding every part to show up at a net change figure (for example for property 1 the net change is 5% (=0%-1%+6%+0%). This modification factor is applied to the crude cost per sq. footage to determine the balanced cost per sq. footage (for example for property 2 it is Rs. 32,308= (30,769X1.05). We use a similar methodology to determine the balanced cost per sq. ft for tantamount properties (see the red featured box for beneath). At long last the cost per sq. ft for the subject property is determined by taking the average of the equivalent properties. For the property viable it is Rs. 32,419(=(32,308+33,450+31,500)/3).
When we have the cost per sq. ft for the subject property then we basically duplicate with the gross zone to think of the last valuation. For this situation it is 32,419X12,000=Rs. 39 Crores.
Advantages: The key quality is the effortlessness and the straightforwardness of the methodology. As it is grounded in the ongoing exchanges it mirrors the effect of past market developments appropriately.
Disadvantages: On the negative side, the valuation relies upon a plenty of subjective decisions in form of the accepted change factors. Accordingly, a nitty gritty understanding of equivalent properties is basic for the valuation. The other weakness of this methodology is that it is free of things to come viewpoint. For instance, if the market is overheated over the most recent few years and is required to crash later on then this valuation methodology won’t have the option to protect the investor form the approaching accident.