With any real estate investment, accurately determining the value of the project at a point in time is one of the most critical pieces of information you’ll use. Real estate values change over time, and a myriad of factors influence the value. Appraisals represent an independent professional’s estimate of the market value of a property based on a host of assumptions. Real estate appraisals generally indicate three types of value.
The appraisal’s As-Is Value is an estimate of the market value of the asset with no changes made to it. This could be the value of a bare piece of ground prior to construction starting. This value could also represent an existing building that is currently unoccupied, or is in need of considerable repair. Finally, it could simply represent a fully-occupied or fully-utilized building that is being purchased. In all cases, the idea is that the value represents what the property is worth as it stands today. Generally, the date of the As-Is Value is the same, or very close to, the date of the appraisal itself.
The As-Completed Value acknowledges that there is construction work to be done. With construction financing, this value is attributed to the property once construction is complete and the municipality has issued a certificate of occupancy. This value would not include the value of any leases or use of the building for its intended purpose; it is a projected value assuming nothing more than satisfactory completion of the planned work. The appraiser will have a copy of the construction plans and the timeline, so the value is assumed as of the date of expected completion.
The third and final type of real estate valuation is the As-Stabilized Value. This methodology assumes that the property has achieved stabilization, or “normalized occupancy.” Stabilization may not mean 100% occupied; over time there will be periods when the property is not occupied, even if it is a single-tenant property. In most asset classes, 3%-10% vacancy on an annual basis is assumed to be an average, meaning stabilization may be achieved at 90-97% occupancy. This valuation will also indicate the expectation of how long it will take to achieve stabilization- the time period between receiving a Certificate of Occupancy and achieving 90%+ occupancy.
Appraisals are a Great Ongoing Educational Resource
Real estate appraisals are perhaps one of the best sources of information you can find to build your industry knowledge. Contained within appraisals are valuable details on other properties that are comparable to the subject property, such as land values, rents, and cost of construction. You can also find demographic information on the surrounding market, top employers, credit quality of the city and or county, and overall economic climate for the region. While many appraisals are over 100 pages long and a tough slog to read through, the information you can glean and apply to conversations, investment models, and your general industry knowledge is well worth the time. Consider it an investment in your real estate future!