Real estate appraisal is an essential part of many activities. It is needed in real estate financing, investment analysis, selling real estate properties, and property insurance. A residential real estate appraisal is especially useful when deciding for the asking price of a property for sale. This article discusses the basic facts you need to know about residential real estate appraisals.
First, you need to know how to determine the value of a property. The benefits of owning a real property are often enjoyed for many years. Estimating the value of a property takes into account several things such as governmental regulations, environmental conditions, and economic and social trends. Often, these things affect the value of a real estate property:
Demand
Utility
Scarcity
Transferability
Real property value is not similar to its price or cost. Cost refers to the materials, labor, and other expenditures. Price, meanwhile, is the amount that the buyer pays for the property. Price and cost can affect property value, but they are not determinants of value. For example, you can sell a house for $200,000 but its value could be higher or lower. A faulty foundation can lower a house’s value while a neat front yard can add value.
A real estate appraisal is an opinion of the value of a particular real estate property as of a specific date. Its goal is to determine the market value of that property. It is an estimate of the most reasonable and competitive price. Often, when a real estate owner is pressured by an imminent foreclosure, the market price is lower than the market value.
There are several appraisal methods, but the accuracy of the appraisal depends on the data collection method done by the appraiser.
The first method is the sales comparison approach or the market data approach. It is done by comparing that particular property to other properties recently sold with the same characteristics. It is often used when determining the value of a single-family home and land.
The second is the cost approach method. Other than determining the value of the land, this method also requires a separate appraisal of the building. Both the estimates of the land and the building are added together to determine the total value of the property. Additionally, it takes into consideration the possible depreciation or deterioration and obsolescence of the building features.
Lastly, there is the income capitalization approach. It takes into account the relationship between the net income of the property and the rate of return that the buyer requires. This method is often used for income-generating properties like office and apartment buildings.
Whether it is a residential real estate appraisal or appraisal of a commercial property, it is important that it be accurate. While licensed and skilled professionals perform this task, you can benefit a lot from having a basic knowledge of the fundamental concepts of real estate appraisals. This is especially helpful if you are involved in a real estate transaction.