3 Appraisal Methods to Plug the Real Estate Market Data Gap in Nicaragua

(These work even in the absence of official market comps)

by SAN JUAN LIVE

We believe that a key component of a healthy real estate market is access to reliable market data.

Why?

Because good market data helps you make the best decisions about buying or selling real estate.

If you're a buyer you can move forward with confidence, knowing that you are paying the right price for a property.

And if you're a seller you can establish an asking price that’s not too high, not too low, but just right for a quick sale.

But how can you get your hands on this kind of market data in a market without:

  • A multiple listing service (MLS),
  • Readily available licensed appraisers, or
  • Reliable and comparable data on actual sales prices?

Here are 3 appraisal methods to plug the data gap and determine how much a property is worth in the Nicaragua real estate market.

Let’s go over them.

1. The Cost Approach

This is one of the most overlooked valuation methods for property in Nicaragua.

It involves setting the market price for a piece of property by determining the cost to reproduce the same property.

The method only applies to properties with homes or improvements on them, not raw land. It's a useful tool in Nicaragua where so much of the built construction is relatively new. However it does not take into account variables such as owner usage restrictions or monthly HOA dues.

Here's the formula:

Property Value = the cost of land + the cost of construction

*Note that typically you would subtract the depreciation value to calculate the property value using the Cost Approach method but we’ve intentionally left it out because so many properties are new on the market and there is no generally accepted market depreciation rate in Nicaragua.

2. The Income Approach

As suggested by the name, the Income Approach determines property price using the amount of income the property produces less the expenses incurred on an annual basis. There are several variations of the Income Approach, however for the purposes of the real estate market in San Juan del Sur and the Emerald Coast it makes the sense to keep it simple. Here’s how:

  1. Estimate the annual operating expenses on the property (this should include all expenses - everything from power and water bills to property management expenses and annual property taxes).
  2. Estimate the annual gross income on the property (annual gross income on the property should include all sources of income on the property).
  3. Calculate the net operating income of the property by subtracting the annual operating expenses from the annual gross income.
  4. Estimate the capitalization rate by dividing the net operating income by the original purchase price that you paid for the property.

Back in 2005 when we first got into the real estate business in Nicaragua, this method was not an appraisal option that would have worked in San Juan del Sur because there were so few turnkey properties on the market for rent, and even less available for sale.

Then, most houses and condos were sold pre-construction. We could look to hotel rental rates for estimates to project rental income for clients on a seasonal basis, but those projections were a guess at best.

Today, while it's becoming possible to evaluate property using the Income Approach, your average local realtor may not know the “Capitalization Rate” (rate of return) on commercial properties on the market in your target area. This is because it's still difficult, if not impossible in some cases, to determine the actual income vs expense for properties in the region, as a result of poor or nonexistent record keeping, widely fluctuating expenses such as for water and power, or simply the misrepresentation of information in the marketplace.

Property Value = Net Operating Income / Capitalization Rate

However if you’re selling or considering purchasing an income generating property it’s worth seeing whether you can use the Income Approach method of valuation to help determine the right price for your property.

3. The List Price Comparison Approach

The best way to plug the data gap is to build your own personal source of market comps by collating list prices of property for sale.  While asking prices are not a perfect reflection of fair market value - they reflect what the vendor would like for their property - in a world of imperfect information they’re the best place to start.

As a buyer not only will the information help you to recognize “the one” when it comes around, it will also be a huge asset when it comes to negotiating a price on your own terms.

And as a seller you’re letting data drive your pricing strategy, rather than just plucking a figure out of the air and hoping it will sell.

But getting the listing price data together takes effort.

In fact you’d need to spend hours on research.

The good news?

We’ve done some of the research for you. We’ve collected data from 35 real estate developments located in 12 neighborhoods.  And the data is not just for vacant lots, we’ve got turnkey property too.

You can have all of this market information. Right now.

It's Yours: A Real Estate Market Report for San Juan del Sur and the Emerald Coast

After dozens of hours compiling price-lists from developers, re-sellers as well as owner-direct listings, we’ve prepared a Real Estate Market report for San Juan del Sur and the Emerald Coast.

Our goal is to plug the data gap in the market and help you avoid making an expensive mistake whether you're buyer or a seller in this market.

Click the button below to grab your copy.

Download The Real Estate Market Guide