Quick-Start Property Valuation Checklist

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The Definitive Checklist for Valuing Properties
The Definitive Checklist for Valuing Properties1792×1024 639 KB

The Definitive Checklist for Valuing Properties

1. Lease Documentation Analysis

  • Verify the existence of written leases for all tenants.
  • Obtain complete lease documents, including addendums and modifications.
  • Review lease terms for rights and responsibilities of both parties.
  • Consult a legal advisor for lease analysis.
  • Assess potential upside in leases (higher income/stability of tenancy).

2. Analyzing Lease Types

  • Evaluate residential leases for hidden clauses like future rent concessions or limits on rent increases.
  • Analyze commercial leases for key terms like signage rights, expansion/contraction rights, and tenant mix restrictions.
  • Prepare written lease abstracts for commercial properties.
  • Obtain lease estoppel certificates from commercial tenants.
  • Review tenants’ financial statements and recent sales information.

3. Strategic Lease Renewal Planning

  • Check lease expiration dates and prepare for negotiations based on current market conditions.
  • Estimate costs for tenant renewals, including concessions and improvements.

4. Economic Principles of Property Valuation

  • Evaluate demand, utility, scarcity, and transferability of the property.
  • Consider the effects of regression, progression, and conformity on property value.
  • Determine the property’s highest and best use.
  • Understand the difference between fair market value and investment value.
  • Avoid overpaying based on investment value.

5. Sourcing Valuation Information

  • Consult professional appraisers for an objective property value.
  • Use Competitive Market Analysis (CMA) or Broker Price Opinion (BPO) from brokers/agents.
  • Consider the seller’s own valuation research.

6. Value Benchmarks

7. Avoiding Overbuilding Risks

  • Compare investment property cost with new construction cost.
  • Avoid investing in markets where new construction is more economical than existing properties.

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8. ROI Analysis in Investment

  • Analyze four elements: net cash flow, tax benefits, equity buildup, and appreciation.
  • Avoid basing investment decisions on emotions.

9. Figuring Net Operating Income (NOI)

  • Calculate projected NOI.
  • Use current and projected NOI for valuation.
  • Record and verify all income using a zero-based budget concept.
  • Assess tenants’ financial strength and future potential.
  • Calculate Gross Potential Income (GPI) and Effective Gross Income (EGI).
  • Account for vacancies, concessions, and collection losses.

10. Operating Expenses Forecasting

  • Forecast projected operating expenses using a zero-based budget.
  • Include management fees even if self-managing.
  • Obtain updated quotes for insurance and utilities.
  • Consider all other operating costs (landscaping, maintenance, etc.).

11. Cash Flow Analysis

  • Determine Before-Tax Cash Flow: NOI – Debt Service – Capital Improvements.
  • Account for debt service based on firm financing commitments.
  • Plan and budget for capital improvements.

12. Lease Type Impact Assessment

  • Understand different lease types: Gross, Modified Gross, Net.
  • Evaluate impact of lease types on expenses and NOI.
  • Account for CAM charges in commercial properties.

13. Property Valuation Approaches

  • Apply Market Data (Sales Comparison) Approach.
  • Use Cost Approach for unique or new properties.
  • Employ Income Capitalization Approach for income-generating properties.
  • Reconcile results from different valuation approaches.

14. Finalizing Investment Decisions

  • Synthesize all collected data to make a comprehensive purchase decision.
  • Assess if the property’s asking price aligns with your valuation and investment goals.

15. Examining Seller Verification

  • Scrutinize the seller’s claims about rental rates and operating expenses.
  • Verify accuracy of provided financial statements and rent rolls.
  • Adjust your valuation based on realistic income and expense projections.

16. Choosing the Right Numbers

  • Decide whether to base your decision on historical or projected financials.
  • Consider market trends and potential for income growth or expense reduction.
  • Use the most realistic and applicable set of numbers for your investment strategy.

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