Real estate appraisal, also known as property valuation involves a process of counting and developing value for real property. It is a detailed report sharing limelight on the market value of a particular property. Wondering why is it even needed? Well, a real estate appraiser figures out the prevailing market value of the property which comes handy in instances like home equity loans, financing a property, refinancing an asset and other situations relevant to the lines of credit.
Primarily there are three means of appraising real estate – the cost approach, income-capitalization method and sales-comparison approach. All these three methods are put in practice when determining the market value of a property. However, based on the type of real estate in question and the current scenario, every method earns its own share of glory. Let’s dig deeper and understand what these approaches actually signify!
- The Cost Approach – Earlier in time, it was also known as the ‘Summation Approach’. To truck on with this method, it is crucial to have an in-depth knowledge of construction costs and material expenses. Wondering why? Well, this approach determines how much a property would cost with improvements after cutting-down the accrued depreciation rates. Improvements here refer to new construction costs and replacement costs.
Are you heedful about the term accrued depreciation? It refers to the abated value of property over a long period of time due to destruction or usual wears and tears.
When reckoning the value of an old construction, using cost approach may not be ideal. On the contrary, it delivers effective valuation on newer constructions.
- Sales-Comparison Approach – In this method, valuation of properties is calculated on the basis of price per unit area after comparing and learning about the neighboring areas in the vicinity. Typically, this approach involves picking properties of similar characteristics in the same market area that has recently been sold. A real estate appraiser then compares both, cuts down value for comparative deficiencies and adds value for the amenities present and finally comes up with a final valuation.
Mostly, if the investor is keen on conventional financial, the method of sales-comparison is put to use.
- Income-Capitalization Approach – This is indeed the most used and easiest real estate appraisal approach. An investor examines and calculates the income of the property in comparison to similar other properties. Also, if the appraiser on job is already aware of the capitalization rates prevailing in the market for the concerned property and similar types, breaking-down the income of the property based on the capitalization rate and coming up with the market value of the same is easier than thought. Wondering what are income-producing properties? Well, apartments, duplexes are all examples of properties that generate income.
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