Market value

Property appraisals made by experts and certified appraisers can differ by as much as 200 percent, depending on assumptions and methods used for coming up with an economic value for the property in question.

Obviously, it's to everyone's advantage-real estate buyers and sellers, bankers and investors-to minimize discrepancies and ensure that the appraisal is always as close as possible to market value, since so many other terms of the deal are based on the appraised price.

At the end of the day, every deal should happen at market value-the price agreed upon when both buyer and seller are well advised, have access to the same information, and act according to their mutual interests.

What's the best way to come to a reliable and objective price?

The value of a property is naturally linked to its optimal use. First, walk through the following steps and note the characteristics of your property:

1. Identify zoning. Zoning laws have a direct impact on the value of the land. An appraiser may discount a property if she thinks that there may be a conflict with the local zoning board.  Land that has already been zoned for the use you are seeking may cost more, but the risk of local anti-development protests or denial of rezoning applications by local governments is minimized.  Traditionally, cities with lots of development underway are more likely to resist rezoning, because they need to respect existing urban plans and abide by construction rules and regulations.  

2. Validate physical feasibility. What are the physical limitations of the property? Crunch these two numbers:

• Plot ratio: The actual square footage of the proposed site.
• Construction ratio: The maximum buildable area (vertical as well as horizontal) permitted on the site.

3. Analyze financial performance. How much will it cost you to develop the property (from acquisition through construction, completion, leasing, or sale), and how much can you expect to earn? How long will each of these phases take? 

4. Choose the property that offers the best financial performance. There are many metrics used to determine how successful a project might be: Internal Rate of Return (IRR), loan-to-value ratios, and debt service coverage ratios are just a few numbers that any real estate investors worth their salt need to understand. Analyzing these numbers based on different development and market scenarios will help you choose the right property for you, its right use, and its ultimate value.

Other factors may determine the appraisal value of the property as well as its intrinsic worth to you. Demolition costs, ownership by community groups such as ejidos, time required to obtain necessary building permits, local crime rates, and even local labor costs all need to be taken into consideration.

What are the most common appraisal methods?

Comparative appraisal: How does your property compare to similar properties that have recently sold? No two properties are identical, but sale prices of properties like yours are relevant data points for what yours is worth.

• Advantages: Easy and fast.
• Disadvantages: Reliable information about market transactions is not always available.

Residual appraisal: This technique subtracts the building costs and profits of a proposed development to arrive at the net land value associated with the expected financial benefits of a development. 

• Advantages: This technique doesn't require finding comparable transactions, and it links the maximum value of a lot to the financial expectations of the project
• Disadvantages: Small changes in individual parameters or assumptions can generate significant changes in the result of the appraisal, so you'll want to model numerous scenarios to understand the impact of different variables.

OK...so where do I go from here?

Now that you know a bit about how the appraisal process works, here are some pointers for increasing the likelihood that you get the most accurate appraisal for your property:

1. Find or commission a market study that examines the feasibility of the project you want to develop, including forecasts of costs and income.

2. Make sure that your estimated construction budget is consistent with reality. For example, labor costs are about 30 percent higher in Cabo San Lucas than in Mexico City, so the same construction will cost more in Los Cabos than in Las Lomas.

3. Set the appraisal cost at the beginning. In many cases, professional appraisers charge clients as a percentage of the appraised property value, creating a conflict of interest and possibly skewing the objectivity of the appraiser.

4. Apply more than one methodology.  Each appraisal methodology has its advantages and drawbacks; I recommend using more than one method so that you can compare the results and come up with the most reasonable estimate of what your property is worth.