Saturday, June 27, 2009

investment value and appraisal

So far we have considered the value of a real estate asset to particular individual, which we have called have investment value. But often we need to know what value a real estate asset may have to an unknown typical investor or purchaser; that is, we need to know the most probable selling price. This is essential, for example, in determining the financial feasibility of development project. It also is important for an owner in determining whether an asset should be held or sold (market price exceeds investor‘s present value), and it is critical to lenders who are concerned with the possibility of needing to sell a property if the borrower fails to pay back the loan. Further, it can be necessary in incremental investment decisions to know how much an improvement to a property affects its future market price in order to estimate its full future benefits. The problem in real estate is that, because of scarce transaction, markets seldom reveal prices easily.
The solution to this problem is called appraisal. Appraisal provides an estimate of the most probable selling price of property. It differs from the investment perspective in that it seeks to reveal what some 'typical," unidentified investor is likely to pay for a property rather than what value the property has to specific owner. But in predicting the probable price to this nameless investor, appraised value really is a form of generalized investment valuation, which also provides a crucial element in making individual investment decisions.

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