Real Estate Valuation

Susan Kelly

Aug 25, 2022

The estimation of the worth of a property is essential to accomplish a range of tasks that include financing, sales listings and property insurance, investment analysis, and taxation. For most people, determining the asking price or purchase price for a piece of property is the most efficient use of valuation for real estate. This article provides an overview of the most fundamental principles and techniques of real estate valuation, particularly in sales.

Basic Valuation Concepts

The term "property" refers to the value of the present advantages from the possession of the house. In contrast to other consumer goods, which are easily used, real estate's advantages are usually achieved over a longer time. So, any estimate of the value of a home must consider the social and economic trends and also governmental restrictions or environmental regulations, which could affect the four components of worth:

  • Demand: A desire or a desire for ownership that is backed by the financial resources that fulfill the need
  • Utility: the capacity to meet the future owners' wants and requirements
  • Scarcity: is the finite supply of property properties that are competing
  • Transferability: The ease of the transfer of ownership rights

Value Versus Cost and Price

Value isn't always the same as cost or price. Cost is the money spent on purchasing things like materials or work. On the other hand, price is the amount one pays for something. Although cost and price may be a factor in value, they will not define value. The house price could be as high as $150,000; however, the house's value could be greater or less. For example, if an owner can find a major flaw in the home, like a weak foundation and the property's value home could be less than the value.

Market Value

An appraisal provides an opinion or estimation about the worth of a property on a certain date. Appraisal reports are utilized by governments, companies and individuals, investors, and mortgage firms when making decisions about real property transactions. The purpose of appraisal reports is to determine the market value of a property - the most likely price the property is likely to fetch in an open and competitive market.

Market price, or the amount a property sells, does not always reflect the actual market value. For instance, when sellers are under pressure due to threats of foreclosure or in the event of a private sale being scheduled, the property could sell at a lower price than the market value.

Appraisal Methods

Accurate appraisal relies on the systematic gathering of information. Specific information, including details concerning the specific property and general information pertaining to the country, region, or city where the property is located, is analyzed to determine an estimate. Appraisals utilize three different methods to assess the value of a property.

Method 1: Sales Comparison Approach

The sales comparison technique is widely employed in valuing single-family homes and land. Sometimes, it is referred to as the market data approach; it's estimate of value derived from comparing the property to recently sold with similar features. Similar properties are known as similar properties; as well to make an accurate comparison, they should:

  • As similar to the property in question as you can.
  • Are being sold in the past year in an open market, competitive
  • Are being sold in normal market conditions.

At a minimum, 3 or 4 comparables must be considered in appraisement. The most crucial factors to consider when choosing comparisons are the dimensions, comparable features, and perhaps most importantly - the place of residence, which could have an enormous impact on the market value of a house.

Method 2: Cost Approach

The cost approach is employed to determine the value of a property that one or more buildings have upgraded. This method is based on separate valuations of the building(s) and the property, which consider depreciation. The estimates are then added to determine how much value is derived from the upgraded property. Cost-based approaches assume that a prudent buyer would not be willing to pay more for an upgraded property than it would cost to buy an identical lot and build a similar structure. This is a good option for properties where the appraised property is of a kind that isn't often sold and is not generating revenue. Examples include churches, schools, hospitals, government buildings, and other institutions.

Building costs can be assessed in various ways, including the square-foot method in which the price per square foot for the newly constructed comparable can be multiplied by the number of square feet in the building being studied and the unit-in-place approach, where the cost estimates are by calculating the construction cost per unit of measurement of each building component comprising labor and material as well as the quantity-survey technique which calculates the number of raw materials required to build a replacement for the building, in addition to the price currently charged for the components and installation cost.

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