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Different Property Valuation Methods

Jul 27, 2023

Investors employ diverse real estate appraisal and valuation methods that offer distinct benefits. Understanding these methods is essential for effective commercial and residential real estate valuation. Learn about the most common property valuation methods.

Sales Comparison Approach

When using the sales comparison approach, the appraiser collects data on recently sold properties that are similar to the subject property in terms of location, size, features, and condition. This data includes the sale prices, as well as any relevant adjustments to account for differences between the subject property and the comparable properties.

After collecting the necessary data, the appraiser performs a thorough analysis to determine the subject property's market value. This analysis examines the similarities and differences between the subject property and the comparables. The appraiser will consider location, lot size, number of bedrooms and bathrooms, age, and overall condition.

Adjustments are then made to the sale prices of the comparables to account for any differences, such as a larger lot size or an additional bedroom. These adjustments are based on the appraiser's professional judgment, expertise, market trends, and data.

Once the adjustments have been made, the appraiser arrives at an estimated value for the subject property by reconciling the adjusted sale prices of the comparables. This estimated value represents the subject property's market value as of the appraisal's effective date.

Cost Approach

When utilizing the cost approach, appraisers begin by assessing the land value separately, as it is a separate entity from the improvements on it. Next, they evaluate the cost associated with the construction of a property with similar utility and functionality to the one being appraised. This includes considering the expenses related to materials, labor, and other construction costs.

To arrive at an accurate value, the appraiser must account for depreciation. Depreciation can occur due to various factors, such as physical wear and tear or economic factors affecting the property's desirability. The appraiser assesses the extent and impact of depreciation on the property and adjusts the cost estimate accordingly.

Income Approach

The income approach considers and capitalizes the property's potential income into a present value estimate. The appraiser gathers property rental income data, such as lease agreements, rent rolls, and occupancy rates. Additionally, they collect information on operating expenses, including maintenance costs, property taxes, and insurance.

Next, the appraiser evaluates the property's potential income by analyzing market conditions, rental rates, and comparable properties. Once the potential income is estimated, the appraiser applies a capitalization rate to convert the future income into a present value. The capitalization rate is derived from market analysis and reflects the investor's required rate of return and perceived risk associated with the property.

The final step involves calculating the property's value by dividing the potential income by the capitalization rate. This estimates the property's worth based on its income-generating capacity.

Price Per Square Foot Approach

The price-per-square-foot method of real estate appraisal is a widely used approach to determine the value of a property based on its size. In this method, the total cost of the property is divided by the total number of square feet it encompasses. By calculating the price per square foot, real estate professionals can assess the market value of a property and make comparisons to similar properties in the area.

To estimate the value of the property in question, the appraiser multiplies the average price per square foot by the total square footage of the property. This multiplication yields an estimated value based on the prevailing market rates.

Have questions about the appraisal process? Choose East Coast Appraisal Services, a respected team with over 30 years of real estate experience. Fill out our appraisal order form to get prompt assistance with your commercial or residential real estate matter.

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