To help explain how to find valuation on a property, we are going to explain the three approaches to take when determining valuation before making an offer.
These approaches are the comp approach, income approach and cost approach. The most important part of investing and acquiring an asset is when you purchase that asset at the right price. This technique usually determines if you are going to make or lose money on your investment.
The comp approach is when a real estate agent helps determine the cost by finding other comps in the neighborhood or surrounding area. Comps mean comparable pricing, meaning the valuation of the most recent sold asset purchased in last thirty days. In 2006 if you used this approach the investor would have overpaid for their property. Mainly because at that time the valuation of the property was inflated. The comp approach is the least desirable approach when determine the price of the asset. If you are not careful, using the comp approach sometimes the investor will overpay for the asset or property.
The safer approach is the income approach. if you determine your valuation by the income approach you will never be in a position to lose money. The income approach is determined based on what the investor can rent the property for. With this approach if the market takes a downturn the investor can always rent his property to cover the expenses until the market recoveries. Lastly and the best approach is the cost approach.
The cost approach is what it will take to build that property at that given time. If the price is lower than what it takes to build that property then you should be purchasing a great deal. Here is a good example of what approach to use and not to use during 2006 to 2010 real estate crash. Real estate normally has a three percent inflation rate normally. However, in 2006 the inflation rate went up to ten percent. This was due to hype in the marketplace. If bought based on the comp approach, in 2006, you would have lost money for sure. However, when the market began to crash and in 2010 if you took the cost approach method and seen started buying houses below what you could build them for, then you would have made a great investment. In 2010, I had many friends take advantage of this economic crisis when the cost approach was in effect and decided to take a risk in acquire massive amounts of property at this time. Of course, my friends are ahead of game today, however, we don’t know when the next downturn will be, as long as they can rent the property my friends should be fine. Please considered these approaches when buying your next real estate asset.
For more information on acquiring real estate you can go to www.DiverseInvesting.com or purchase The Road Map to Investing on Amazon.
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