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A Sound Real Estate Valuation Requires an Eye for Detail

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Clancy Fossum. December 18, 2018 . real estate

A real estate valuation is the albino buffalo of the thundering asset herd, a unicorn in a field of wild horses. What, pray tell, does Embark mean by that, you ask? Has someone spiked the consulting punch again? We're glad you asked because real estate, as you likely already know, is one of the more unique asset classes, a valuation riddle that is only solved once the sale is complete and the costs are allocated.

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Unlike other assets with more definitive values and a transparent, high-velocity marketplace, a real estate valuation is, by nature, imperfect and loaded with assumptions that can often make it feel like throwing darts across a stiff wind. Such imprecision can be a bit maddening to an accounting team not familiar with the lay of the valuation land. Therefore, because we care, Embark is providing a few quick accounting tips for a real estate valuation to make your next acquisition smooth as silk and free of unwanted surprises.

 

Know Thy Source

Floyd the barber and the incredibly helpful produce guy at the supermarket might have opinions about real estate values, but it’s in your best interest to seek true expertise. Comb the market for a reliable, reputable source with a solid reputation, clout, and an exemplary track record. Also, obtain third-party market reports to enhance your understanding and perspective of the specific marketplace. In other words, know what you’re getting yourself into.

 

Be Organized and Cohesive

A real estate valuation is never shy about endless streams of documentation and paperwork, and for good reason. To preserve your accounting sanity and a smooth, hassle-free acquisition, gather a unified source of documentation for transfer of title, appraisal documents, comparative analyses, and property accounting records. Since this list of documents isn’t exhaustive, any additional information needed along the way should always be critically inspected and the source fully understood.

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It’s also important to remember that many data points may come from different departments and groups, so an acquiring firm should always prioritize information that’s sourced directly from the owner of such information. Likewise, make certain both your accounting team as well as the property’s accountants walk the same road, each agreeing to the accuracy and consistency of the documentation before popping any champagne. Establish a relationship with the property’s previous owner, thoroughly vetting all documentation produced while also maintaining open and frequent communication.

 

Dot All I’s, Cross All T’s

A real estate valuation can’t be too meticulous. Pertinent details will come in all shapes and sizes and from sources ranging from legal closing documents to property accountants. In the long run, a detail-oriented approach will reap just rewards, even when such an approach is a bit tedious and time-consuming. Make sure you fully understand the inputs used in all reports and sufficiently vet each and every line item for accuracy, identifying and analyzing the allocation flow of the purchase price as well.

 

Steer Clear of Accounting Woes

Obviously, there are many accounting pitfalls that pose potential problems when walking down the real estate valuation road. Between the guidance in ASC 820, straight-line rent, franchise agreements, and any possible preferred equity ownership structures, there’s plenty of ways for even highly organized and meticulous valuation efforts to go seriously astray. Fortunately, all is not lost because your friends here at Embark can help you address those pitfalls and turn your valuation frown upside down.

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Simply put, despite the many moving parts within a typical real estate acquisition that don’t always move in harmony with one another, the process doesn’t have to be chaotic and disorganized. In fact, quite to the contrary, take these accounting best practices to heart, leave no valuation stone unturned, and rely on Embark to make the experience stress-free and efficient from stem to stern.

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