This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
The daily duty of every real estate broker is to value real estate, and this is called appraising. There is but one basis of appraising, and that is the one of rental return. What rent will a given property bring?- - in other words, the return on the investment. A good definition of an appraisal is the price the property would bring from a purchaser who did not have to buy from a vendor who did not have to sell. Such a purchaser would base the fee, first on the gross rent return, and then capitalize this rent on the rate of interest he expected to get on his money. For instance, he expects a net return of ten per cent. The net rental is ascertained to be $5,000. Therefore, $5,000 is ten per cent of the value of the property which, in that case, would be $50,000. Of the two things to determine, net rental and rate of interest to expect, net rental is the easiest. But that entails a thorough knowledge of existing conditions, rentals in similar properties, percentage of vacancies, cost of repairs and running expenses. Rate of interest is much harder to determine, and is governed entirely by the rate of interest secured by adjacent or similar property owners, which brings the appraiser back in a circle to the market price of the property. This is almost wholly determined by what other and similar property has sold for, or the price at which like property is held. Again the great value of records - First, legal sales, as published and compared in various publications of the Record and Guide, and the Realty Records Co.; second, the broker's own knowledge of prices secured; third, the varying conditions surrounding each parcel of property.
In appraising vacant property, the appraiser must first imagine an adequate improvement on the property, determine its value from similar properties, as explained above, subtract the cost of erecting the building from the total, which will give the value of the vacant land.
A very rough method of appraisal is to take the valuation placed upon it by the city in the tax assessments (which are published in the City Record) and add ten per cent or twenty per cent.
There are boom times in real estate and periods of comparative stagnation, but all the time there is some buying, some mortgaging and some renting. The real estate man who understands the proper use of records is seldom or never without some promising deal on hand, and is enabled to pick and choose the very remunerative deals on the flood tide of prosperity.