Real Estate Appraising Methods
Banks use appraisals in order to determine how much they can loan you when you purchase real estate. We will describe the basic methods used.
There are 3 basic methods of appraising or valuing a property:
Sales Comparison or Competitive Market Analysis:
An analysis of the sales prices of similar properties is made. During that analysis process adjustments are made that take into account the differences between the properties, i.e., financing, time on the market, condition, etc. Then, a probable sales price can be determined.
An analysis of the sales prices of similar properties is made. During that analysis process adjustments are made that take into account the differences between the properties, i.e., financing, time on the market, condition, etc. Then, a probable sales price can be determined.
Cost Approach:
This method can be used in determining the value of proposed or brand new construction, as well as existing structures. An estimate is made of the cost to reproduce the improvements of the property. Then, the amount, if any, of depreciation of the building is subtracted, and finally the value of the land is added to come up with an estimated probable sales price.
This method can be used in determining the value of proposed or brand new construction, as well as existing structures. An estimate is made of the cost to reproduce the improvements of the property. Then, the amount, if any, of depreciation of the building is subtracted, and finally the value of the land is added to come up with an estimated probable sales price.
Income Approach:
This is the approach typically used in establishing the value of rental properties, i.e., homes, apartment buildings, etc. First off, an acceptable capitalization rate is established, i.e., say people are seeking a 10% return on their money. Then, the net income produced from the property is determined to be, say $10,000. So, the estimated probable sales price would be determined to be $10,000 divided by 10% or $100,000.
This is the approach typically used in establishing the value of rental properties, i.e., homes, apartment buildings, etc. First off, an acceptable capitalization rate is established, i.e., say people are seeking a 10% return on their money. Then, the net income produced from the property is determined to be, say $10,000. So, the estimated probable sales price would be determined to be $10,000 divided by 10% or $100,000.
Please feel free to call Mark Shuman, CRS whenever any real estate questions arise at 828-659-8444 (Worldwide Realty, LLC). Please remember that we help people sell real estate, as well as purchase real estate!