Is my appraisal right? (for newbies) What is true Value?

A lot of people say you need a professional to determine the actual value of a piece of property. That is true but you only need the true value of the property at the closing table. So in other words there are a few different ways for a new investor to come up with a value on a property close enough to make a good offer. So things wont come back to bite you in the form of liquidated damages of your earnest money.
One way to determine the value of the property you would like to invest is through comps. To begin all you need is the address of the property. Then you can run your own comps. Compare your house to what others that have sold, also compare to the ones that are still on the market. Educate yourself on how much more or less a cape cod is compared to a ranch. Is it because of popularity, or how about the number of rooms. Sounds hard but its very easy. Then simply divide average price by average sq/ft equals your average price per sq/ft. Now multiply your sq/ft of the subject property by the average price/square foot of the houses sold. Also find out how long a property sat on the market, if you plan to flip, but if you are getting a really good deal. It will sell like hot cakes. Then that is the fair market value of your house.

Then just to check your math, next do a cap rate analysis, now you know how much your property is exactly worth. But true value is what someone ends up paying for a property. Deteremined by compared facts and emotion.

Its up to you to determine how much a property is worth. You are the professional, you are not desperate to buy a house. They are desperate to sell.

I didn’t know what a cap rate was so I looked it up, I copied it for anyone else that didn’t know what it was:

Cap Rate - Capitalization Rate
  The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties.  Put simply, the cap rate is the net operating income divided by the sales price or value of a property expressed as a percentage.  Investors, lenders and appraisers use the cap rate to estimate the purchase price for different types of  income producing properties.  A market cap rate is determined by evaluating the financial data of similar properties which have recently sold in a specific market.  It provides a more reliable estimate of value than a market Gross Rent Multiplier since the cap rate calculation utilizes more of a property's financial detail. The GRM calculation only considers a property's selling price and gross rents. The Cap Rate calculation incorporates a property's selling price, gross rents, non rental income, vacancy amount and operating expenses thus providing a more reliable estimate of value.     
 If we have a seller and an interested buyer for particular piece of income property, the seller is trying to get the highest price for the  property or sell at the lowest cap rate possible.  The buyer is trying to    purchase the property at the lowest price possible which translates into a higher cap rate.  The lower the selling price the higher the cap rate.  The higher the selling price, the lower the cap rate.  In summary, from an investor's or buyer's perspective, the higher the cap rate, the better.

  Investors expect a larger return when investing in high risk income properties.  The Cap rate may vary in different areas of a city for many reasons such as desirability of location, level of crime and general condition of an area.  You would expect lower capitalization rates in newer or more desirable areas of a city and higher cap rates in less desirable areas to compensate for the added risk.  In a real estate market where net operating incomes are increasing and cap rates are declining over time for a given type of investment property such as office buildings, values will be generally increasing.  If net operating incomes are decreasing and capitalization rates are increasing over time in a given market place, property values will be declining.   

  If you would like to find out what the cap rate is for a particular type of property in a given market place, check with an appraiser or lender in that area.  Be aware that the frequency of sales for commercial income properties in a given market place may be low and reliable capitalization rate data may not be available.  If you are able to obtain a market cap    rate from an appraiser or lender for the type of property you are evaluating, check to see if the cap rate value was determined with recent sales of comparable properties or if it was constructed.  When adequate financial data is unavailable, appraisers may construct a cap rate through analysis of its component parts thus reducing the credibility   of the results.  Cap rates which are determined by evaluating the recent actions of buyers and sellers in a particular market place will produce the       best market value estimate for a property. If you are able to obtain a market cap rate, you can then use this information to estimate what similar income properties should sell for. This will help you to gauge whether or not the asking price for a particular piece of property is over or under priced.</blockquote>

You did good Rich_in_CT, that was sorta what i was looking for. Too long and drawn out, just looking for core material. I meant to leave the cap rate unexplained, so i could let someone else give their view point. Still looking for a more simplier answer.

All I needed to see was this part: " In summary, from an investor’s or buyer’s perspective, the higher the cap rate, the better." That was enough info for me… :slight_smile:

If the cap rate is 12 from a buy and hold stand point i would like to buy at 7-8 maximum. It just depends on your exit strategy. If its a quick flip then i would buy more closer to 12 because that would still mean a profit. Cap rate is only good when used from the right side of the spectrum. See a seller would like to receive a profit based on a 12 and a buyer would like to buy for a 7-8. Also the cap rate and gross rent multiplier are basically the same accept the gross rent multiplier gives down to the cent.