Property Valuation in Kisumu- 3 Property Valuation Methods for Real Estate Investors

 

As you concerning the players working together with property appraisal in Kisumu, you'll find that we have interacted with situations pushing different property valuation methods. Within this article, I think want to pay attention to four property valuation Kisumu practices are available not only to real estate investors but also finances seeking to apply a property as security for financing.

Property valuation is absolutely to be able to and know ahead of purchasing a property. As a property valuer in Kisumu, we always advise our clients and also enlighten them on the importance of obtaining services of a property appraiser in Kisumu. That many people depend on only location and square footage of a property as determinant of the property value and this may be misleading. An investment may look the perfect one for investment on the basis of location and square footage than it actually is.

As a company offering commercial valuer in Kisumu, We rely on scientific approach to property valuation. This calls for applying of calculations and careful estimates driven by values of neighboring properties.

As an experienced commercial valuer in Kisumu, you can find used three traditional approaches to valuation. The three traditional property valuation methods include;

·         Comparable sales approach

·         Income approach

·         Cost approach

Comparable sales approach

This procedure identifies past transactions of comparable properties or rental comps as a basis to determine the value of a property. As a Kisumu home valuer firm, we have found this method helpful especially where the properties many of characteristics.

As a Kisumu home valuer, our 1st step forward with this strategy is to find the nearby properties a twin of the property in question and which were recently sold.

To provide a valid and useful comparison, each property must;

Be as similar to the subject property as they possibly can in terms of property type, square feet, number of beds/baths, etc. Have been sold within the last year in an open, competitive market? Have been sold under typical market conditions?

As a Kisumu real estate valuer, we always go for three or four comparables or comps in our real estate valuation process. We also consider any recent upgrades or new amenities to the properties. Location still plays a key thing the valuation of a property and even in picking appropriate comparable. You should know that location of a property can look good at first glance but may be deceptive if you are searching at the long term valuation of a property.

We have experienced and we know as Kisumu real estate valuer that there are no two identical properties. Therefore you need to make adjustments to the comp prices to take care of the dissimilar features.

Other factors that would affect the value of a property include:

Property size

Lot size

Property age and condition

Physical features and amenities, including landscaping, type and quality of construction, number and type of rooms, square feet of living space, hardwood floors, a garage, kitchen upgrades, a fireplace, a pool, central air, etc.

Location desirability

Proximity to property in question -- the closer, the better. You especially will want to rule out comps on the other side of a busy street, as there will often be large discrepancies. It might even be more suitable to look at the houses down the street rather than the one directly across the street.

Date of sale (Remember: the more recent, the more accurate) The valuation for the subject property will fall throughout the range formed by the adjusted sales prices of the comps.

You should have in mind that the adjustments made on the sales price of the rental comparable will be more subjective than others. This method of property valuation that we use as Kisumu property valuers may tend to be very subjective and not accurate because of the element of guesswork that is applied in varying the sale price. So minimum variance and chance of error, a lot of consideration is almost always given to properties with near zero or minimal adjustment.

Income approach

This method of income approach is also termed as income capitalization approach. It’s a valuation of real estate commonly used for rental properties in conjunction with commercial real estate properties. Many estate valuers in Kisumu use this method by converting the income of a property into an estimate of their value.

The income capitalization approach, or income approach, is a valuation of real estate commonly used for rental properties and commercial real estate properties. This method converts the income of a property into an estimate of its value. Doing housing appraisal in Kisumu over the past a huge number of have exposed us to different valuation scenarios with unique characteristics but in many cases, income approach has proven so helpful in establishing the value of a property.

This is a good method to use especially when you want to invest in a real estate property so you decide to know also what is likely to come out as returns from it. In income approach, you consume a formula called IRV as follows;

Net operating income (I) / capitalization rate (R) = value (V)

To understand this formula better, you need to break it down into simpler steps, by first calculating Net Operating Income (NOI).

How to Estimate the Net Operating Income

1. Calculate the annual potential gross income

The potential gross income is the potential rental income of the property when rented at 100% capacity.

For example, if an apartment in Nairobi attract a monthly rental income of Ksh.300,000, then your annual potential gross income is 12 x Ksh300,000 = Ksh.3,600,000.

2. Calculate the effective gross income

This number, which usually is expressed as a percentage, is the appraiser’s estimate from the market for these kinds of buildings in the local area. The effective gross income is the potential gross rental income plus other income minus the vacancy rate and credit costs. As a player in housing appraisal Kisumu, we have seen how this is important.

For example, the vacancy rate of property could be 10% and the additional income might be Ksh10, 000 each month, or Ksh.120, 000 annually.

At this point: A property with a potential gross income of Ksh.3, 600, 000 - 10% vacancy (or Ksh.360, 000) additional income (or Ksh.120, 000) = Ksh.3, 360, 000.

3. Calculate the net operating income (NOI)

As one of the leading Kisumu building valuer, we usually advocate that you begin by deducting annual operating expenses such as real estate and personal property taxes, property insurance, management fees (on or off-site), repairs and maintenance, utilities, and other miscellaneous expenses (accounting, legal, etc.).

Net Operating Income (NOI) = Effective gross income - operating expenses

At this point: Our Effective gross income is Ksh.3, 360, 000 for this property. Let’s say all the additional operating expenses are Ksh.860, 000 for the property. This means the NOI is Ksh.2, 500, 000.

Now that you have your NOI calculated, you can continue on to estimate the valuation of your chosen property.

4. Compare similar cap rates

A capitalization rate is the same as a rate of return that is undoubtedly, the percentage that investors hope to get out of the building in income.

Look at similar properties’ cap rates to estimate the price an investor would pay for the income generated by the particular property. As a commercial valuer Kisumu, we have often adopted a cap rate of 10% though sometimes we use the Central bank of Kisumu base lending rate.

5. Apply the cap rate to the property’s annual NOI

This last step allows you to form an estimate of the property’s value, and where the formula is used.

All you have to do now is divide the NOI by the cap rate.

To finish the example: Ksh.3, 360, 000 / 0.10 = Ksh.33, 600, 000.

Ksh.33, 600,000 is the estimate of the valuation of this property, using the income capitalization approach. As Kisumu housing appraisal expert, this value looks so fair and a true reflection on the cost of putting up such a property.

Key Takeaways:

The income approach is a real estate valuation method that makes use of the income the property generates to estimate fair value. It is calculated by dividing the net operating income by the capitalization rate. Doing this requires the most calculations to be done, that happen to be tricky, but gives some of the most accurate results and as Kisumu property appraisal firm, we will always advocate for it.

When using the income approach, a buyer should keep in mind to the condition of the property, operating efficiency, and vacancy rates. The bigger the amount the vacancy rate, the lesser the earnings will be and vice versa. For a buyer, a better vacancy rate a great idea in getting a lower valuation for a property but the source of high vacancy should be interrogated and be investigated to ascertain what to stay on done to reverse it.

Cost approach

The cost approach takes the view that the price a buyer should pay for a property, land or building, should equal the cost of building an equivalent building. The market price for the valuation property is equivalent to the cost of the land, plus the cost of construction less depreciation. As a commercial valuer in Kisumu, we have seen this method yielding the most accurate market value only when the property is new.

The cost approach does not focus on comparable properties or income generated by the property like the two methods previously discussed.

Instead the cost approach values real estate by calculating how much the building would cost today if it were destroyed and needed to be replaced. It also factors in how much the land is worth and makes deductions for any loss in value, otherwise known as depreciation. Kisumu real estate valuation practitioners concur that this method is more appropriate for a new property.

The wisdom behind this method is that a buyer may only want to pay equivalent amount adequate to build a similar property. However, is hard for Land valuers in Kisumu to use this manner to value undeveloped land.

The weakness of this method is that it doesn’t find out surrounding factors or factors that are specific to the property which ultimately affects the value of the property.

The most widely used cost approach appraisals include:

Reproduction cost - The cost to construct an exact duplicate of the subject property at today’s costs.

Replacement cost - The cost to construct a structure with the same usefulness (utility) as a comparable structure using today’s materials and standards. When all estimates tend to be gathered, the cost approach is calculated in the following way:

Value of the Property= Replacement or Reproduction Cost – Depreciation Land Worth

Being a building valuer in Kisumu, we have identified a few areas where cost approach work best. The cost approach works best on the following property types:

Rural properties - When there are no other properties nearby, it is unacceptable value a property via the sales comparison approach. This calls for adoption of cost approach.

New construction - The cost approach is often used for new construction, too. Construction lenders require cost approach appraisals. It is because any market value or income value is dependent upon project standards and completion. As a firm offering Property valuation Kisumu, we perceive cost approach very approach for new constructions.

Special use properties - Includes schools, government buildings, and hospitals. These properties generate little income and are not often marketed. This invalidates the income and comparable approaches.

As a Kisumu property valuer, we have done several valuations of schools and hospitals using this method. Property appraisal in Kisumu has developed and even some clients understand why cost approach is used in these special use properties.

Insurance - Insurance appraisals tend to use the cost approach. This is because only the value of improvements is insurable and land value is separated from the total value of the property.

Commercial properties (sometimes): The income approach is the main method used to value commercial properties. However, as we have experienced as a Kisumu commercial valuer, sometimes it’s not easy to use income approach on certain commercial properties. Sometimes a cost approach may perhaps be implemented when design, construction, functional utility, or grade of materials require individual adjustments.

Do you really a need to do property valuation in Kisumu? We at West Kenya Real Estate Ltd are here to guide you straight. We do valuation for many needs, including but not limited to, for mortgage, security, book keeping, taxation, court bond, sale or acquisition and quite a few other reasons.

At West Kenya Real Estate Ltd, we have large team of professional and licensed property valuers who would do valuation anywhere in Kisumu. Check with us today. You can email us on info@westkenyarealestate.com or call us on 0789-217-685 or 0798-952-518.