Real Estate Appraisal: 3 Ways Property Valuation Works
One of the most important aspects of a real estate transaction is property valuation. Real estate investors and home buyers don’t want to spend their money on a property with no value. This is why evaluation is so important.
A property appraisal helps determine the present value of an investment. The property’s value must be stated to quantify the benefits and obligations arising from owning the property. Not the actual value of the property. However, this is an unbiased, third-party assessment based on an arm’s length transaction. It provides an appraiser’s assessment of the most likely price or value in a healthy competitive market.
This article will help you understand property valuation and different valuation approaches/methods. First, let’s look at the definition of real estate appraisal.
Property Valuation is the process of valuing properties for sale. It is also the process that allows an investor to obtain a second opinion from a neutral party on the market value of a particular property.
Reviews are needed for a variety of reasons. This includes sales, transfers, tax assessments, expropriation, inheritance or real estate settlements, and investment estimates.
However, in most cases, real estate transactions involving any form of debt financings, such as bank loans or other funds, require a real estate appraisal to determine the value of the land or building being purchased.
This prevents banks and other financial institutions from lending borrowers more money than the house is worth. Property appraisals must be performed and certified by an inspector, Appraiser, or real estate agent.
During the valuation process, appraisers must consider factors that significantly affect value to accurately determine the value of a property. These factors include economic, social, and environmental developments, government regulations, and laws.
Property Valuation Methodologies
Property Valuation: Comparison Approach
This approach is also known as the sale approach. A valuation method for residential real estate. The Appraiser compares the property in question to similar or comparable properties recently sold in the neighborhood.
At least 3 or 4 benchmarks must be used in this evaluation process. Location, which can significantly impact a property’s market value, is the most important factor to consider when selecting comparable properties, along with the size and other similar characteristics.
The Appraiser considers the price difference between these properties and the valued property to determine the expected value.
Property Valuation: Cost Approach
This approach is commonly used when valuing new buildings and land. The Appraiser examines the property, records the type and quality of materials used in construction, and calculates the cost of replacing the property with similar materials.
This method is useful for evaluating properties that rarely sell, such as schools, churches, hospitals, and public buildings.
Property Valuation: Income Approach
This approach is based on the correlation between the rate of return required by a prospective investor and the net income a property generates. Also known as the Income Capital Approach.
Used for commercial and leased properties. These are assets designed to generate income, such as office parks, retail facilities, and residences. In this technique, the Appraiser considers the property’s current and projected income.
If the property in question is expected to generate future income and its expenses are regular and predictable, the Appraiser should calculate the property’s average annual, monthly, or net income–expected rate of return.
Property is valued based on expenses, income, and fair market value (FMV) compared to other assets of similar Nature before the sale or in the event the home is desired to be refinanced. To determine, it is often evaluated of similar nature. Understanding valuations can help you make informed decisions and get a better deal on the property you want.