Valuation and Appraisal Methods in Real Estate Investment
A real estate appraisal is the process of calculating the worth of a property in the market. An appraisal is an integral part of property investment as it provides the nominal value of a property based on its features and other factors in the market.
Real estate appraisal methods are used to determine the fair market value for reasons such as the sale of the property. In this article, we will go through some of the appraisal methods for real property and mention their importance in real estate transactions.
The Market Comparison Approach
As you may have guessed, this method of valuation uses comparisons with other similar properties in the market to find the value. The properties used in making such comparisons ideally have similar features to the subject property.
The features to look out for include location, square footage, the number of bedrooms and bathrooms amongst others. The market comparison method is the simplest and most common appraisal method since it uses historical transactions and the value is adjusted according to the features that are present or missing from the subject property.
The Income Approach
This approach is commonly used to find the value of income-generating properties such as commercial properties. It is used to calculate the value of a property by taking its total annual income and dividing it by the rate of capitalization.
The first step in appraisal using the income approach is calculating the gross income potential of a property. This is how much gross income a property would produce, assuming it was fully occupied.
The next step would be to discount the gross income. This would help you achieve an estimate of the property’s net income. Some appraisers might use an estimated percentage based on various factors such as the rental market, the property’s condition, location, and cost.
However, for a more accurate figure, you can use market comparisons to find out the vacancy rates and its costs as well as the estimated operating expenses. These figures are then summed up and deducted from the gross income to get an estimate of the net income.
Finally, to find the value of the property, you take the estimated net income and divide it with the capitalization rate. The capitalization rate is estimated using the recent sales of comparable properties.
The Cost Approach
This approach is used to calculate the value of a property by finding the total cost of replacing it. It is mostly used for insurance appraisals, but it can also be used to calculate the value of new buildings, proposed constructions, and unique properties.
In this approach, an appraiser considers the value of the bare land, added to the total cost of construction with adjustments made for normal wear and tear. The value of the land may be found using the comparison approach.
The Importance of Property Appraisal
Property appraisals are not only necessary for listing properties, but for other purposes as well such as taxation and insurance. Banks also require appraisals to determine how much to lend for mortgages. In other instances, appraisals may be required to settle legal affairs.
It is worth mentioning that the value of a property and its price are two separate things. Property values are determined using the stated methods but the price may be subjective or it might depend on negotiations between the parties involved.
Chris Price Realty can help you identify and negotiate a good deal for your new home. Contact us today for premier real estate brokerage services in Austin, TX.