This is the most common method, in which appraisers value a property based on the recent sales prices of similar properties in the same neighborhood. The first valuation method used to assess the value of the property is the sales comparison method. This method is used for standard single-family homes and is the most common method, since the information collected is necessary for a typical mortgage. The way a comparative sales valuation works is that similar homes in the surrounding area, also known as “Comparatives”, are used to get an idea of the value of similar surrounding properties.
Then, adjustments are made to the appraised value based on the differences between the home you are buying and the comparable properties obtained. For example, let's say that the house you are trying to buy has a recently remodeled kitchen that is of higher quality than the properties to which it is compared. This will increase your appraised value. On the other hand, if the home is in a worse condition or on a smaller plot of land than similar ones, the appraised value will drop.
This method helps ensure that a fair value is determined for the home and that the bank can go ahead with offering a purchase loan backed by value data. The second valuation method used to assess the value of the property is the income approach. . This includes apartment buildings or office buildings that will have tenants and single-family or double homes with leasable space.
Using an income approach, the appraiser will assess the earning potential of the property. Let's say it's an apartment complex with 10 rooms. The buyer of the property could provide data on the rate at which those rooms will be rented to get an idea of the gross income potential. From there, that number is compared to the costs associated with acquiring the property and other overhead costs to determine what the value of the property is.
Your county appraiser and his appraisers use one or more of the three valuation approaches to prepare the appraisals that the appraiser uses to estimate fair market value for property tax purposes. The cost approach estimates value based on the typical cost of the materials and labor needed to build a structure of similar size and quality in that location, while taking into account depreciation due to age and condition. The sales comparison approach estimates the value based on the price, in the local market, necessary to purchase a property of similar location, quality, size, age and condition. The revenue approach estimates value based on the typical market income of a similar property.
In the cost-to-value approach, the cost of acquiring land plus the cost of improvements minus any accumulated depreciation equals value. Depreciation is a loss of value for any cause and may take the form of physical deterioration, functional obsolescence, or economic obsolescence. The underlying premise of the cost approach is that “a potential real estate user won't, or shouldn't, pay more for a property than it would cost to build an equivalent one. The three different types of approaches or methods for conducting an evaluation are the cost, comparison of markets and revenues approaches.
These approaches are economic models that represent different ways of estimating the value of property. Appraisers use their experience to determine the most relevant approach for the type of property in question. The valuation of a property is more of a technique than a fact-based exercise, and the valuation approach provides the context through which the appraiser delivers his expert opinion. The decision to use one appraisal approach rather than another often depends on the type of property in question and the context in which the appraisal is carried out.
This type of real estate appraisal is considered the most accurate valuation, since it uses recent market values on comparable properties. .