How To Determine Value In A Real Estate Appraisal

During a real estate appraisal, there are different methods used to determine the value of a home

. Simply looking at it and adding everything up doesnt necessarily make a great way to determine its entire value. Knowing how these appraisals work gives an owner insight into the process and prevents scams or deceit. Primarily, there are three approaches to determine value: the cost approach, the sales comparison approach and the income approach.

The Cost Approach

With the cost approach in a real estate appraisal, the sum of the property and land is added and the depreciated value of any home improvements is subtracted from the value. In this model, the current cost of building a home, with the newest prices and materials is taken into account during the appraisal. For larger properties, or commercial properties, the replacement cost is determined, which means the total cost of labor and materials to completely replicate the property.

The Sales Comparison Approach

This method looks less at the property and more at the investors or buyers interested in the purchase, as well as comparative property. The appraiser considers comparative properties that have a similar construction, size and value and will alter his or her value based on this. This method is research intensive, since an appraiser needs to look at multiple homes that were recently sold and the value of the comparative features.

The Income Approach

This final approach is used for commercial or investment properties, because it puts stress on the propertys value-in-use (the amount of money brought in by a property). To determine this, the market value of the building and property is taken into account as well as the income stream the property has brought in.

Determine the Method

For residential sales, the first two methods are used, either in conjunction or alone. In cases where comparative data cannot be found, or the property is unique, then the income approach is the most common. This method is also used for insurance purposes, since most homeowners insurance companies will pay for the replacement cost of a property, minus depreciation.

The decision on appraising a home is up to the company or firm completing the real estate appraisal, as well as the party requesting the valuation. Researching and deciding on the correct approach to value your home is an important step, since this will determine the market value and selling price of your home. The better the appraisal, the better chance of a fair selling price for your home.

by: Leon Belenky

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