Real Estate Accounting Made Easy, 2nd Edition

11REAL ESTATE VALUATION AND INVESTMENT ANALYSIS

WHAT IS REAL ESTATE VALUATION?

Real estate valuation is the key to investment in the real estate market. Valuation answers the question: How much is this property worth today? Investors use different types of analysis and procedures to determine the valuation of a particular piece of property.

Market value of a real estate asset is commonly defined as “the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.”¹ Valuation helps estimate the price at which the buyer could be willing to buy and the seller could be willing to sell. Obviously it is not uncommon for the buyer and the seller to come up with different values for the same asset. The seller most likely comes up with a value on the higher end of the range while the buyer comes up with a value at the lower end of the range. However, there is always that price at which the asset would be sold by well-informed, willing, and able buyers and sellers. Real estate valuation helps the parties come to this price quicker and avoids wasting time in the negotiations.

An important concept in real estate asset valuation is that investors' expected return has an inverse relationship to the price of the asset. This inverse relationship exists because in a real estate valuation model, the future ...