Estimating the value of real estate is necessary for a variety of endeavors, including financing, sales listing, investment analysis, property insurance, and taxation. Improper site valuation can have a significant trickle-down effect on the entire commercial real estate project.
The due diligence process can be quite complicated, which is why we want to take a look at a few factors that help establish an accurate site valuation.
Performing a Market Analysis
The sales comparison approach is the standard valuation method for raw land. The sales of "comparable" raw land parcels are analyzed to provide an estimate of value for the subject property. Failure to obtain enough (and accurate) comps can lead to improperly valuing the property.
Additionally, warped comps will severely impact the developer's basis making it tremendously difficult to obtain favorable construction debt.
Commercial real estate appraisals assess the physical structure, zoning records, geo-demographic information, financial records, leases, and comps to value property as well as determine its best use. It’s important to ensure the seller provides current and updated financial information to the appraiser.
The appraisal valuations for developers are, 'As Is' and 'As Completed'. This document is so critical that federally regulated banks will derive their final point of leverage from the appraiser’s valuation.
There may be a number of documents that are requested and reviewed during the due diligence process. This may include a thorough review of insurance policies so that the buyer can see any claims that were made against the property and information related to the value of the property.
Title review can be one of the most important elements in establishing property valuation because it can establish whether a property is even usable or not. A title commitment should establish that the seller does, in fact, own the property and address any liens, easements, reversions, or covenants, conditions, and restrictions (CCRs).
Reviewing the Seller
The due diligence process may also look at the standing and track record of the seller. Information such as past litigation, loan documents, or any cited claims or violations should be gathered, as they’re critical to the proper valuation of the transaction.
Insights into the seller and their history as a property owner will go a long way in establishing what’s a fair deal for the site and ultimately the site valuation.
The Trickle-Down Effect
Determining a project’s budget, expenditures, and the overall plan begins with the valuation of land. Being too aggressive when it comes to underwriting the deal can lead to improperly valuing the property. And improperly valuing the property can drastically impact the entire project feasibility and the residual use of a project, should anything go awry.
Taking the necessary steps, performing proper due diligence, and establishing an accurate site valuation is critical to the entire commercial real estate development project.