Valuation of property is required in various cases, for example, when selling it at auction or when acquiring with a mortgage. To do this, independent experts with optimal skills and experience are involved to determine the optimal value of a particular asset. The most common requirement is to evaluate property owned by companies. It is usually represented by different real estate or equipment. Experienced experts use different methods of property valuation, and often several methods are used at once, which allows to obtain the most reliable results.
When is an evaluation required?
The need for this procedure may arise in different situations. She may be:
- Obligatory. It certainly must be carried out if the privatization procedure is being carried out or the property is being inherited. Companies without fail resort to the process when undergoing bankruptcy or restructuring.
- Voluntary. Usually, property owners resort to valuation, who want to get information about the value of their assets and property represented by residential or commercial premises, land or other objects.
The approaches and methods for assessing real estate are the same for all experts, but it is important to apply only to experienced appraisers who have the appropriate license, accreditation, experience and equipment for conducting the process.
What factors are taken into account?
When conducting the assessment, the different criteria of the selected equipment or property are certainly taken into account. These include:
- location of real estate;
- area of the room;
- equipment dimensions;
- general condition of the facility;
- degree of wear;
- cost of similar items;
- market situation in a specific region or in the whole country.
After the analysis, the experts generate a report. It certainly describes the methods used to assess property, and also provides an assessment regarding the condition and value of the item. Determine the market, inventory, cadastral or any other value can only specialists with the appropriate certificate, giving the right to engage in this activity. Therefore, the choice of an independent appraiser should be approached responsibly. It is advisable to completely address this issue to state organizations.
The objectives of the process
Numerous property valuation methods are used for a variety of purposes. If this process is carried out by individuals in relation to different material objects, then usually they need to perform different actions:
- make various transactions with values represented by sale, donation or inheritance;
- purchase of an insurance policy for an object, since when determining the cost of the policy, the insurer needs to have information about its price;
- provision of specific property to a banking institution as collateral for a loan;
- when calculating the amount of damage caused by unauthorized persons or various emergency situations;
- inheritance;
- the formation of a prenuptial agreement at the conclusion of a marriage between two citizens.
Not only private individuals, but also different companies can apply for an assessment. To do this, different methods for assessing property and liabilities are used, but most often this process is performed to achieve the following goals:
- different objects are transferred to the authorized capital of the enterprise;
- various operations are carried out with the business, for example, investments are attracted or loans are issued, the organization is prepared for restructuring or the company is being sold;
- equipment or cars are leased;
- company property for sale.
The result of this process is the formation by an expert of a relevant official document with legal force. It can be transferred to various banking institutions, government agencies, courts or insurance companies. Additionally, this document applies to tax or accounting.
Assessment Methods
In carrying out this work, independent appraisers can use different methods of valuing property. There are several classifications:
Classification of Valuation Methods | Varieties of methods |
According to the approach to pricing | Mass, on the basis of which many objects similar in statistical parameters are evaluated |
The individual method involves determining the price of only a specific object, for which its various criteria are studied |
By type of property | Valuation of real estate represented by buildings or land |
Movable objects that are equipment or vehicles |
Business, with the valuation usually being different securities or shares in companies |
At a determined value | The market is represented by the reasonable price of a particular object |
Investment allows you to determine the estimated return on the use of a particular property for certain purposes |
Liquidation provides an opportunity to obtain information about how much money can be obtained by selling an object based on its current condition |
The value for tax purposes is used in calculating the tax paid to the budget on the basis of the company's ownership of certain property |
Recycling involves the use in the evaluation process of all costs for different materials used to create the facility, as well as the costs that must be incurred for disposal of property |
According to the pricing approach | Profitable, taking into account the possible profitability from the use of a specific value |
Expendable, involving accounting for possible costs that the owner of the property will have to incur when using it in business |
Comparative is to use different indicators of several similar objects. |
All of the above methods for assessing the value of property are significant. Each option involves the use of its own indicators and criteria.
Assessment Approaches
The valuation methods of the organization’s property are chosen by the appraisers themselves, although when concluding a contract, clients can independently indicate which particular method is most attractive and acceptable to them.
Some appraisers offer the ability to determine the value of a particular property based on three approaches. Under such conditions, the most reliable information provided by specialists is obtained.
Profitable way
Of all the approaches and methods for assessing property, this option is considered not too popular. This is due to the fact that often unreliable results are obtained. It involves accounting for income that may be received by the owner of the object when it is used for its intended purpose for a specific number of years. Under such conditions, forecasts are made regarding the potential value of the property.
When using this method, two methods of property valuation can be applied:
- Capitalization of income. This calculation option assumes that the value is represented by the value calculated by dividing the net operating income by the capitalization rate. It is important to take pre-tax income. The capitalization rate is calculated depending on the rate determined by the financial regulator. In addition, it changes when taking into account the existing risks.
- Discounting cash flows. This calculation option is considered appropriate for use if income from the use of property is constantly changing. Also, this method of assessing the property of an enterprise is effective when using different capitalization ratios.
Professional appraisers rarely use the profitable method of determining the value of certain assets, since often an unreliable result is obtained.
Comparative approach
In another way, this method is called market. It is considered the simplest mathematical method for assessing the value of property. To determine the value of a particular object, the price of similar assets is estimated, whose price is well known and correctly calculated.
When choosing objects to be compared, it is important to consider certain standards. According to them, objects that have the same economic, material or technical parameters are considered identical.
During the calculations, different methods can be used:
- deals;
- accumulation of assets;
- net assets;
- industry ratios;
- property;
- replacement cost.
Typically, appraisers with significant experience apply several methods at once, which allows them to obtain the most reliable and optimal result. When using this method of assessing types of property, it is important to obtain as much relevant information as possible on the status of companies that have certain assets.
Cost method
This method involves calculating the cost based on numerous parameters. These include various factors:
- the value of the land on which the evaluated building is located;
- replacement or reproduction cost;
- depreciation costs of property;
- funds that have to be spent on repaying loans with which the asset was purchased.
With this method of assessing property real estate, all the costs that the owner has to bear to use it in business or other activities are determined. Appraisers often use this approach. In its application, the calculation can be based on different methods:
- accumulation of assets, which determines the value of the company without taking into account various debts;
- net assets;
- replacement prices, for which only tangible assets belonging to the organization are valued;
- replacement cost, which allows you to determine how much money you have to spend to build or create a similar object;
- residual value;
- industry ratios.
Most often, this approach is used if the company plans large-scale construction of a new facility. Based on the results obtained, it is estimated how effective the purchase or sale of an asset will be. Also, the method is often used when purchasing an insurance policy for any real estate.
Initially, with this method, the total cost of reproduction or substitution is calculated. From the obtained indicator, it is necessary to subtract the amount of wear, which can be economic, functional or physical. At the end, the price of the land on which the object is located is taken into account.
The income method has not only advantages, but also some disadvantages, which include:
- obsolete objects are practically not replaced;
- it is impossible to separate real estate and the land on which it is located.
Thus, such a method is considered effective and widespread, although it also has some significant disadvantages.
How is the assessment made?
The procedure can only be performed by an experienced appraiser with the appropriate license and knowledge. He must use various mathematical methods for assessing property in order to obtain relevant results.
The assessment process is divided into several successive stages:
- initially, the evaluator himself is selected, who can work in a state organization or a private commercial company;
- an agreement is drawn up on the basis of which an assessment will be carried out;
- the task and statement are formed by the customer;
- the necessary documents from the company are transferred to the appraiser, and information related to the evaluated object is also provided;
- the appraiser makes an assessment and analysis, for which he studies the market situation, changes in the value of various assets, and also makes calculations using different formulas based on the chosen approach and method;
- the customer may indicate in the application which method of determining the price should be used by a specialist;
- the results are analyzed and summarized;
- a valuation report is issued by a specialist, which indicates the value of the property studied and other information necessary for the customer.
The assessment is usually carried out within two weeks, but a specific period is agreed in advance and prescribed in the contract. The cost depends on various factors, which include the type of property, the complexity of the work and other parameters.
Conclusion
Property valuation is considered a specific process that should only be performed by experienced professionals. The procedure can be implemented by different methods, and three different approaches are used for this.
Order assessment should only be in companies that have a license for this work. Based on the analysis, a professional draws up an act containing information on the value of the property.