Whether you are deciding to buy or sell a property, settle an estate or divide assets during a divorce, establishing the correct value of a property is critical.
Estimating the asking or purchasing valuation of real estate property is also important for investment analysis, property insurance and taxation purposes. Here we will detail a few primary considerations in the real estate valuation process and how an appraiser can help you make sound judgements with your decision.
Sales Comparison Approach
A extremely common approach to valuing residential real estate is called the sales comparison approach or SCA. In laymen terms, a sales comparison approach is the contrasting of two to three similar properties in the area that have been either rented or sold within the last 12 months. A lot of investors wish to see any potential valuation trends that have happened over a noteworthy time period.
The sales comparison approach is heavily related to per square foot valuations. For example, if a 3,000 square foot property is sold for $4 per square foot, it is not unfair for investors to expect a similar amount of rental income relative to area as earned by other investment property owners in the area. Although SCA is a rather generic approach, it’s critical to keep in mind that every property is unique and sometimes will be valued at more or less than its neighbors — depending upon upgrades, amenities or any repairs or renovations the property must undergo to be sellable or rentable.
Another way appraisers estimate property values is to figure out the amount that it would cost to replace or rebuild an asset at current market prices. If the price of replacement for a property in its current physical condition is lower than the cost to replicate it so as to acquire the level of services enjoyed when the home was originally purchased, then it is considered to be in a poor state and shouldn’t be replaced.
The third most familiar method is cost approach and can estimate a property’s value that has been improved by nearby buildings. The process includes the separate estimations of building and land values and takes into consideration the depreciation of these properties. The estimates are added together to calculate a value for the entire improved property.
Another factor to consider when it comes to real estate property valuation is anything that negatively impacts the value or improvement of the property. Known as depreciations, these can include:
– Physical damage or deteriorations, such as necessary roof replacement, structural damage or landscape issues
– Features that are outdated and no longer desirable by property owners, including older fixtures and low ceilings
– Factors that are external to the property, such as being located near a noisy bar or highway
The Importance of a Employing a Professional
When it comes to finding the correct value of a property, hiring a professional appraiser goes a long way toward making sure the job gets done correctly. An appraiser is able to take the proper measures to find the correct valuation of a property. With sights set on maximizing the buyer or seller’s return upon their investment, the appraiser makes an subjective estimations about the market value of a property by employing or more of the methods listed above.
Determining the value of real estate generally comes at an important time in a person’s life, such as taking on the emotional burden of an estate settlement or deciding to buy one’s first home. This is why it is critical to hire an appraiser that you can trust based on past reviews, credentials and experience.