How can real estate valuation be a strategic tool? There's money to be made with valuation, and not just by the appraiser. Valuation can provide a wonderful arbitrage opportunity for informed investors.

Everyone knows what is meant by the "value" of a real estate asset, don't they? But perhaps it is not quite that simple. The explanation below will show you how to make money with valuations......

The Market Value of an asset reflects generally-perceived market conditions. This is different from the Intrinsic Value of the asset, which reflects the real market conditions.

The objective of Intrinsic Value appraisals is to determine the underlying value of the real estate asset, independently from typical current beliefs and perceptions. The Market Value will migrate over time towards the Intrinsic Value when and as the potential investors grasp the market realities. The differential between Intrinsic Value and Market Value creates the arbitrage which fuels speculative investments.

The old investment adage "You can't argue with the market." is correct in that if a seller wishes to sell an investment then the price it will fetch is the market price at that time. However, if the market has not yet recognized that the conditions under which it fixed the price do not reflect the true conditions, then the market price will change once the true conditions are recognized.

If the market indeed fixed the Market Value under a misunderstanding of the existing conditions, then the asset has another value, in addition to the current Market Value. That "other value" represents the true market conditions. It is the Intrinsic Value.

An investor who recognizes the difference between the current Market Value and an asset's Intrinsic Value is in a position to gain from the arbitrage between the perception and the reality. Sometimes those individuals are referred to as "speculators". In fact they are merely waiting for the market to recognize the changed conditions. When the market realizes the "correct" value the Market Value changes and the "speculator" can realize his profit.

And that's how to make money with valuations.

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