I was fortunate enough to get a valuation from my real estate agent a few weeks ago, and the numbers were absolutely stunning. It is no secret that there are two vastly different types of valuation – multiples and valuations. Multiples are a rough estimate of the value of something as a percentage of the asset itself.
A multiples estimate is a number that a real estate agent or appraiser might give a property owner to help sell it. Like a simple figure like “5% of the property is worth $100,000.” A multiples figure is typically a range of numbers that are used to estimate, say, the fair market value of a house. There are many different types of multiples.
While multiples are a rough estimate of what a property is worth, a valuation is a more precise figure which is a number that is given to an owner to show that the property is worth what it is worth. Like, if a property was worth $100,000 in June and now it’s worth $100,000.50, a valuation is a number that shows how much more or less the property is worth than when it was first appraised.
Valuation and Appraisal is one of those fields that the average person has no idea about.
Valuations are an important part of property ownership and can be used to determine what a property is worth, how much more money it might be worth to invest in it, the amount of profit a property can make if it is invested right, and many other things. The property industry has the most sophisticated valuation software available and a wide array of tools to use and apply to a property.
Some of the tools used to create valuation multiples is the “delta” method, which is simply the difference between the current appraised value and what the property was valued at when it was foreclosed on. The delta method is a simple concept that can be used to estimate a value change if a property is reassessed (or sold) or it can be used to create a percentage increase in either the original or the new value.
The delta method was once an integral part of the real estate industry, but recently it has been relegated to being a tool used to make money, but the methods has been modified to fit with the current times.
In the real estate industry the delta method of valuing real estate is often used when a property is purchased for sale but is not then sold. This often occurs in the case of an owner selling a property that has already had an appraisal and thus is no longer being sold.
In today’s market, it is common for property to be sold for less than what the current market value was when the property was purchased. It is also common for a buyer to simply buy a property that is worth less than what it was originally valued by the seller. The delta method of valuation is a way to get a more accurate value for a property that is being sold.
To apply the delta method, we divide the current market value by the current asking price. We then take the average (and most often the median, but it could be the average or the mean) of the two numbers and use that as the new asking price. This is then used to calculate the delta value.