The AI Revolution in Real Estate

​Real estate valuation refers to the process of determining the worth of properties. The method considers factors like lot size, the property’s location, floor plan, and the amenities available within the property’s vicinity. Property values can also hinge on the future or potential benefits that will accrue for the prospective buyer.

Several entities must know the value of real estate properties, including buyers, insurance companies, commercial banks, and the government. Insurance companies use valuations to assist in loss adjustment for insurance claims. Commercial banks need the information before financing the purchase. Governments use the valuation to determine their property tax rate.

Additional factors that affect property valuations include government policy and regulations, environmental trends, and city planning trends. However, these factors don’t impact property valuations overnight; instead, the benefits actualize after long periods. These factors also considerably impact other elements of value like transferability, demand, scarcity, and utility.

Transferability describes the ease of transferring a property from the current owner to the new one or how easy it is or will be to transfer the property to another prospective owner. Demand describes the number of interested buyers per property, while scarcity refers to the supply or availability of competing properties within the market. Utility describes a property’s ability to satisfy the owner or prospective owner’s present and future needs.

In real estate valuations, many people conflate value, price, and cost. However, each represents a different concept. The value of a property does not always equal its price or cost. While price refers to the monetary sum a prospective buyer is willing to let go to purchase a property, cost describes the actual expenditure incurred in the development and marketing of real estate. Cost can include the sum spent on building the property, providing domestic utility, and advertising.

Although price and cost have an effect on the value of the property, they are not the sole determinants of how a property acquires value. For example, a realtor or a homeowner might decide to sell a property for $400,000 when, in reality, the value of that property is worth much more or less. In this scenario, $400,000 is the price of the property, and it is separate from the actual value of the property. If a private or public agency erects a major road adjacent to the property, the property’s value may increase.

Real estate professionals might give an opinion or provide an estimate during a property’s evaluation. These opinions are usually referred to as appraisals. Appraisals can be conducted through three approaches, namely the cost approach, the income capitalization approach, and the sales comparison approach,

The cost comparison approach usually involves taking separate estimates of the land and the building. The separate estimates are then added up to determine the property’s value. The income capitalization approach involves assessing the rate of return the investor seeks with the net income that will likely accrue from the property. The sales comparison approach or the market data approach involves estimating the value derived from the property when compared to other properties with similar characteristics or attributes.

However, appraisals differ from valuations. An appraisal provides an opinion on a property’s appropriate or actual value within the market context.

Based on their years of experience within the market, real estate agents might conduct a free and oral appraisal of the property for the prospective buyer. On the other hand, while real estate valuations serve as assessments of the property’s market value, someone pays for them and receives them in writing.

John Hofmann, Wilmette

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