Variance In Real Estate
Variance refers to the difference between what you expected and what happened. It can refer to a range of numbers, but it’s primarily used in finance, where finding variances helps investors see how their investments are performing. For example, if an investment company expects its net income for this quarter to be $4 million, then any number below or above would be considered variance against expectations.
Calculating these kinds of variances requires high-level skills with financial models and other data analysis tools. There are multiple types of real estate variances, including encumbrance, liquidation value, and price. Let us have a look at each one by one.
Real estate encumbrance variance
An organization’s financial statement measures the difference between the actual and the standard expenditure charged during a specific period. The real estate industry may be defined as “The sum of all investment-related expenditures not recovered from customers in future periods.” In simple words, it is a variance amount by which the current period’s budgeted revenues fail to cover budgeted expenses for some specific accounts on an accrual basis.
Encumbrance includes all costs associated with land acquisition, construction, or leasing activities such as commissions, legal fees, interest expenses, etc.
Real estate liquidation value variance
It is one of the essential real estate variances as it helps decide whether or not a particular property should be kept or disposed of. It can also be defined as the difference between the net book value and either an estimated market price, cost to sell at market, or some specified minimum acceptable price. We need the actual cost and estimated market value of a building and land to calculate liquidation value variance. Let us assume that the true cost of a building and land is $8 million each.
To solve this type of variance, we have to consider the following things:
- Actual sale value may include any costs involved for selling, such as commissions, legal fees, etc. Any expenses recorded on books but yet-to-be paid should also be included for calculating actual sale value.
- Liquidation values are usually calculated using net book values. If any property is sold at a loss, that loss will not be recorded on books; instead, it would be deducted from the cost of another similar type of property bought later on. Thus it is prudent to include only net book value in liquidation value calculation.
Real estate price variance in real estate
It refers to the difference between standard price and current market price/cost per sq. ft. for completed projects or properties under construction. It can further be defined as “The total amount by which costs exceed revenues during an accounting period.” We need to consider cumulative encumbrance (budgeted expenses), cumulative net rental income, and current market price per sq. ft. to calculate this variance.
Price variance calculations in a real estate firm can be cumbersome because it needs cost, revenue, and other related data going back over a set period. While the required data is available in most modern accounting software packages, number, crunching still requires technical skills to perform financial modeling with these data sets.
Price variance calculation for completed properties is not as complicated as they have been already measured based on some unit area such as square feet or linear foot which makes it easier to determine total actual costs from total budgeted costs for this property by multiplying cumulative encumbrance figures with current market price/cost per sq. ft.
How to get a variance?
Since liquidation value is nothing but an estimated market price, it can be used in place of the actual cost to calculate liquidation value variance.
Price variance calculations for ongoing properties are complicated because they have not been measured based on any common unit area and may require multiple comparisons with a similar type of property under construction or completed ones. Such difficulties arise when we do not have standard netbook values or do not know the current market prices for completed properties (which are usually the case).
Process of getting a variance in real estate
Real estate usually has specific standards you must fill for your property to meet. But, what if the standards are too strict for your family’s needs? Or, there may be other reasons why you cannot meet them. You might need a variance. This allows an exemption from the zoning laws so you can meet your needs.
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1. Fill out an application
First, you must fill out an application to request a variance. Make sure to use the correct form and know what you are asking for in your application. If there is a complicated situation or a specific type of variance, let the people know about that in the beginning.
2. Wait for a conclusion
If your application is accepted, you will get a summary of the next steps. This will include information about a public hearing and possible tours of your property. You should attend these if you can instead of sending someone else in your place. Be sure to tell all the people involved with your case when you cannot participate in. This will not affect the decision they make on your application.
3. The appeal procedure
If you are denied a variance, you have the right to appeal. It means you want someone else to decide if your request should be approved. Sometimes, this means going before a Zoning Board of Appeals or an Administrative Law Judge. You will have to fill out another application if you are denied again.
Property owners can ask for variances to the present zoning regulations for various reasons. A local governing body enacts zoning laws, often known as zoning ordinances, to limit the uses that can be made of land in specific zones.
When is a variance needed, and what does it entail?
A property owner asks for a variance when the intended use of their land conflicts with municipal zoning regulations designed to preserve property values. A clash, if approved, serves as a waiver of some zoning rules or laws.
