Determining the Value of Assets
Hard assets or otherwise: Real Estate, Loans Secured by Real Estate, Diamonds, Stocks, etc)
"You can't trade, what you can't grade."
A major aspect of just about all real estate purchases and loan placements is the ability to determine value.
There are different "types" of Value as value means different things to different people.
FAIR MARKET VALUE - The highest monetary price that a property would bring, if offered for sale for a reasonable period of time in a competitive market, to a seller who is willing but not compelled to sell, from a buyer, willing but not compelled to buy, both parties being fully informed of all the purposes to which the property is best adapted and is capable of being used.
Loan Value - Since a lender's security for a real estate loan is the sale of the real estate in the event of default on loan, the loan value is usually a conservative estimate of market value.
Approaches to Value
Value is determined in three different ways, known as Approaches to Value by appraisers.
The three Approaches to Value are the Market Data Approach, the Cost Approach, and the Income Approach.
Keep in mind that future income is impacted, positively or negatively by the "Four Great Forces" that influence value. Investors should be cognizant of these forces in the areas where they own property or plan to own real estate. These "forces" will impact the income which can be generated from any given property and the value of the income-producing property is directly related to the income the property produces.
Element of Value:
Demand
Utility
Scarcity
Transferability
The Forces Influencing Value are:
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1. Physical Forces - the quality and convenience of schools, shopping centers, playgrounds, transportation systems, etc. It also includes the climatic conditions.
2. Social Forces - Population growth or decline; Marriage, divorce, and birth rates; educational and religious standards.
3. Economic Forces - Business and real estate cycles, variations in directional growth, natural resources, wage levels, tax levels, and insurance schedules.
4. Political Forces - Zoning, fire and police protection, government loan, and other subsidy programs.
Value by the Numbers
The value of an income-producing property is directly related to the net income the property produces. The greater the net income, the greater the value. Net income can be increased by increasing gross income, decreasing expenses, or a combination of both.
1. Gross Multipliers - Value=GSI X GM
(Does not take into consideration expenses).
2. Value using "Cap Rates"
Income (Net Income) = Rate (Cap Rate) X Value
Value =Net Income/Rate
Cap Rate = Income/Value
(The lower the Cap Rate, the higher the value)
As we move into the future, determining the value of assets will become more transparent, and accurate.