Economic value is appropriate for buildings whose value is based on the income they generate. It corresponds to the price a buyer would pay on a free market, on the basis of the income the building would generate and the buyer’s own investment criteria (e.g. rate of return, interest rate, financing conditions).
Economic value is an ideal tool for an individual who wants to invest in real estate, and also for mortgage creditors. Most financial institutions give loans based on economic value rather than market value. As such, an individual who wants to take out a mortgage would benefit from determining economic value, since it is generally lower than market value and thus lower than the price paid. The financial ratios are therefore likely to differ from those anticipated.
For financial institutions, economic value provides a shelter from the risks of real estate boom cycles and represents a value that more closely reflects balanced market conditions, which better reflects a long-term financing outlook.
In appraisal, economic value is estimated using the income approach, which forecasts the net income a building can be expected to generate over its economic life at the anticipated rates of return and based on precise financing criteria. As regards income-generating property, all our appraisal reports that focus on the market value of a building also indicate its economic value. At HPDG, we provide you with both values in the same appraisal report.
Moreover, HPDG has developed financial analysis procedures that allow you to obtain relevant information and results that reflect the financial situation of your building as compared with ratio trends in the market.