Question

Why is it difficult to accurately value real estate? Give specific reasons?

Answer 1

It is difficult to accurately value real estate because of the fact that the valuation of real estate is unlike any other form of valuation (for instance valuation of a company using concepts like discounted cash flow valuation or dividend discount valuation method).

The value of a real estate property, technically spoking, is the present worth of the future benefits that arise from the ownership of that real estate property. The problem area with regards to real estate is that benefits arise and are realized over a very long period of time. Over this long period of time economic factors and social trends will most likely change and this will affect the benefits that will come from the real estate property. Moreover over a long period of time government regulations, policies and framework will change and such changes will make it difficult to determine elements like demand of real estate, utility of real estate and transferability of real estate.

Value of real estate is based on the prevailing market value and the concept of market value in case of real estate is highly subjective in nature and hence cannot be determined in an objective manner always. Also many real estate properties are not comparable in terms of size, location and quality and so market value of real estate can differ largely and significantly from one area to another.