Real Estate Finance in a Nutshell Essay

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Real Estate Finance in a nutshell At least four evaluations methods are commonly used to value real estate assets. The most common method is the use of comparable transactions. Real Estate specialists have databases of transactions which reflect the characteristics of the asset (number of square meters, type of building, purpose –office, commercial or residential use-, timeworn, geographic location, size, property rights conveyed…), the date of the transaction, the financing terms, the economic conditions related to the asset such as its operating expenses, the expenditures made immediately after purchase, and the price. These databases enable realtors to estimate the price of a building they have to sell. The comparable transactions method is widely used for residential buildings. In such a case, the value of a building is derived by analyzing the market for transactions of similar properties and comparing those properties to the subject property. It assumes that real estate assets are substitutable and that the real estate market is a fair and competitive market. Once adjusted, the prices must be converted into the price per an appropriate unit of comparison such as square meter for houses or offices, cubic meter for warehouses, seat for cinemas, or room for hotels. The price of a new property is then simply given by the product of the number of appropriate units by the price per unit. The second method, called the direct cost approach, considers the amount of money that would be spent in order to replace the existing property with a similar one, but with current technologies materials and standards. It is based on the principle of substitution: an investor should not pay more to buy an existing property than he would accept to pay to build a new one. The value of an existing property is equal to the cost of reconstruction minus the depreciation of the property

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