Real estate valuation is required for financing, listing, investment analysis, property insurance, and taxation. An incorrect site valuation can significantly impact the entire commercial real estate project.
Because the due diligence process can be quite complicated, we’d like to look at a few factors that can help establish an accurate site valuation.
Conducting a Market Analysis
The most common method for valuing raw land is the sales comparison approach. The subject property’s value is determined by examining the sales of “comparable” raw land parcels. Inadequate (and inaccurate) comps can result in an incorrectly valued property.
Furthermore, warped comps will significantly impact the developer’s basis, making it extremely difficult to obtain favorable construction debt.
Appraisal of Real Estate
Commercial real estate appraisers examine the physical structure, zoning records, geo-demographic information, financial records, leases, and comps to value property and determine its best use. The seller must provide the appraiser with current and up-to-date financial information.
Developer appraisal valuations are ‘As Is’ and ‘As Completed.’ The appraiser’s valuation is so important that federally regulated banks will base their final point of leverage on it.
Examining Documents
Several documents may be requested and reviewed during the due diligence process. It may include a thorough review of insurance policies so that the buyer can see any claims against the property and information about the property’s value.
Title review is one of the most important elements in determining property valuation because it determines whether a property is usable. A title commitment should establish that the seller owns the property and address any liens, easements, reversions, covenants, conditions, and restrictions (CCRs).
Examining the Seller
The seller’s reputation and track record scrutinize during the due diligence process. Past litigation, loan documents, or any cited claims or violations should be gathered, as they are critical to the transaction’s proper valuation.
Insights into the seller and their history as a property owner will help determine a fair deal for the site and, ultimately, the site valuation.
The Trickle-Down Effect
Land valuation is the first step in determining a project’s budget, expenditures, and overall plan. Being overly aggressive in the underwriting process can result in an incorrect property valuation. In addition, incorrectly valuing the property can significantly impact the overall project feasibility and the project’s residual use if something goes wrong.
Taking the necessary steps, conducting proper due diligence, and establishing an accurate site valuation are all critical components of any commercial real estate development project.
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