1. Sales Comparison
The Sales Comparison method of valuation is the number one most popular valuation method in home appraisals. The reason why this method is so popular is because of its very simple concept. Comparing the home being appraised to other homes that have recently sold.
This is the method used for all types of sales. For example: Imagine that you are driving down the street and need to stop for gas. You see the gas station on the left is selling regular gas at $2.49 a gallon. The gas station on the right is selling the exact same gas for $3.29 a gallon.
Any reasonable person would fill up at the gas station charging less for gas. Comparing the prices of the two left the gas station on the right with no sales. Making sure to price your product at the going rate of similar products gives you a better chance at getting sales.
The same goes when selling a home. The Sales comparison method is simple but efficient. Finding homes that are of similar quality in the same area (because location matters) is how the comparison method works. However, there is more that goes into it than that.
The appraiser will look at several different factors that they will keep in mind during comparisons. Size of the home and the overall property will be taken into account, as well as the location, and the condition is really important as well. They will also take into account any recent updates such as kitchen remodels or roof replacements.
There are many things that go into appraising a home properly. Making sure to choose the right appraisal company is important. Give RE Appraisal associates a call today at 941-743-3700 to learn more about how we can help you.
2. Cost Approach
The cost approach (aka the contractors method) is another very simple concept when it comes to appraisal valuation. Instead of looking at other comparable properties in the area, appraisers who use the cost approach look at your property and then look at what it would cost to completely rebuild that property from scratch.
When taking the building costs into consideration the price of the land must also be taken into account with the overall valuation. So in the end the price of materials, labor, as well as land are all taken into account when calculating the value of your property as it currently stands.
There are two different methods used for the cost approach. The first is the reproduction method. The reproduction method looks at completely replicating the original property as an exact duplication. That means all of the original styles and materials are looked at and factored in at the cost is would take to recreate them exactly in today’s market.
However, there is one major problem with this method. Depending on the age of the property a lot of materials and styles that were used in the original construction might not be available to use anymore. This can cause some issues with being able to reproduce the property exactly.
A lot of things might need to be recrafted or hand made which will drive up the cost significantly and might not give you a clear representation of what the property is actually worth.
The other method is the replacement method. This method is a little more practical in it looks at recreating the property with similar or comparable materials that are currently available in today’s market. This provides a much more accurate reflection and understanding of what standard properties sell for.
The cost approach is used mostly for new construction or for properties like libraries and schools for example.
3. Income Approach
The income approach is the third main method used by appraisers to calculate the valuation of a property. The best example of this valuation method would be an apartment building.
An apartment property uses the income approach to determine the valuation amount based off of what income the owner of the property could receive. Since an apartment building is a property that produces money the profitability must be taken into account when valuing it.
To calculate the value simply divide the net operating income (all the revue it generates after paying necessary expenses) by the capitalization rate. The capitalization rate is how real estate investors can determine the rate of return on a property.
This helps them figure out which properties are a good investment and which ones are not. Knowing the capitalization rate can be helpful but should not be used as the only means of determining a properties potential ROI (return on investment).