Imperative of real estate appraisal in contemporary real estate business

Across the globe and for few decades ago, real estate business has grown both in concept and in content, offering lots of innovations for industry players. Whilst outdated ideas are either discarded outright or modified to meet modern realities, new ideas are born to further drive the industry. The ultimate goal of these innovations is to ensure credibility, flexibility, security of funds and manner real estate business practices, as well as maximization of return on real estate investment. Such innovations in real estate business manifest in area of housing delivery and disposal options, financing through variant mortgage plans, real estate sale’s plan, etc.

Similarly, through technological advancement in information dissemination, real estate investors are becoming more aware of most of the innovative options available in market, especially in terms of project financing and acquisition of real estate investment. For instance, housing purchase through off plan basis is becoming prominent due to latent value and synergy (between vendor and purchaser) it creates. Yet, the investors still needs to be well guided in order to ensure he does not only avoid losses but as well, ensure that he invest his scarce fund on the investment option that best suite his goal of investment. Just like a regular investor in other sector, the real estate investors most likely opt for maximum profit. This is the gap real estate appraisal pose to fill.

A real estate appraisal is needed to determine the estimated market value of a house, condominium, commercial property, vacant land, etc. It is used to assist someone in making a decision. They may be considering purchasing, selling, insuring, or lending money on a house, condo, commercial property, or vacant lot. Appraisals are also used for tax purposes to estimate how much money a property owner has to pay in taxes. One of the most usefulness of appraisal is viability appraisal. Here, the investor would like to know which of the investment options guarantee maximum return on capital. Appraisal also compares investment in real estate and investment in other sectors, e.g., stocks and shares.

Basically, appraisal provides answers to the following question;

  • What type of housing unit is best suited for a site? Is it block of flats, detached houses, town houses or terrace houses?
  • What rent is achievable should an investor acquire a real estate at what price?
  • What is open market value of the property, compared with what the vendor is willing to sell?
  • What is the rate of return on investment on yearly basis? Is it higher than other available options?
  • When is the investment pay-back period?
  • What is effect of maintenance on each investment option and how does it affect return on investment?
  • Does the most profitable option translate to best option based on prevailing purposes?

A good appraiser is well equipped, academically and technically, to prepare an appraisal that meets the needs of investors and developers. He does so through adequate knowledge in appraisal models such as cashflow analysis; determination of the Net Present Value (NPV) through discounted cashflow analysis; determination of internal rate of return of each investment options; pay-back model, sensitivity analysis etc.

In summary, the essence of appraisal is to guide decision makers and real estate business operators in real estate in taking a well informed decision as relate to real estate investment.

Uma, A. O is a real estate analyst with 3invest Limited.

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