Is there a method for valuation property?

Question

Is there a method for valuating property? I'd read somewhere that even though property is always valued based on similar properties in that area, I'd also read that there is actually a method to calculate the value.

Please advise. Thank you.

(pardon my grammar for the question. I was half awake when I typed it)

Answer 1

There are 3 general methods of valuation for real estate. One, as you said is by measuring comparable properties in the area, making adjustments for differences such as location, age, square footage, etc., etc. The next is cost of replacement, how much would it cost to rebuild this building if it burned down? Finally, the one you're looking for is the income approach. You take the financial ability of the property (i.e. Rent) and use a general "rent multiplier" for your particular area. Say rent is $1000/month which is $12,000/yr and the rent multiplier for your area is 12. Your house would be assumed to be worth about $144,000. Talk to a real estate agent about this multiplier. Good luck!

Answer 2

Given that appraisers are trained all the time there clearly is a method and that method can be taught.

Do some searched for appraisal training courses.

Note that setting the value based on comparable properties the idea is that two properties that have very similar features will be largely valued the same. This includes bedrooms, bathrooms, size of the house, type of house, condition, school district, location on the street, and other factors such as a pool, garage, upgrades, lot size, and appliances.

If two homes really are similar and you are buying why pay a lot more for one than the other. The only reason would be if there was a difference that matters.

Comps are normally required to be sales that have completed in the last 6 months, no more than 1/2 mile away and with similar details. If one side of the street has lake views and the other does not than homes across the street are not comparable even through they are within 1/2 mile.

Answer 3

I am not a real estate appraiser but I will try to help. There are three generally-accepted ways to value a piece of real estate. Depending on specifics, one or more may not be relevant.

1) Sales Comparison Approach. This is what you mentioned. What have similar properties in the area actually sold for? The tricky part is trying to determine how comparable the properties used for comparison purposes really are. How big of an adjustment should you make for similar, but different, properties?

2) Income Capitalization Approach. This is only used for income-producing real estate such as office buildings and apartment buildings. In this approach, you take the property's future income and discount it to present to result in current value. The tricky part of this is predicting future income and determining the "correct" interest rate to use for discounting.

3) Cost Approach. This approach holds that the value of a real estate parcel is best estimated by the cost to construct. This method is not very useful for a one-hundred year old home, for example.

There are pluses and minuses in each method. Hopefully all three methods will result in a similar answer and support each other.

Answer 4

I am a General Appraiser and I must say that the previous posters are well on track and I would like to elaborate on their responses. There are three general approaches to valuating property. First is the sales comparison approach. This approach compares similar properties that have sold or are in contract (can be used typically for any type of property) and are adjusted based upon a variety of variables (location, sq.ft etc). This is the most common approach to valuing property. The second approach is the income approach (used for investment properties such as strip mall, office building, apartment complex). The first step is to gather rental data to come up with potential gross income and deduct expenses that the owner pays and arrive at net income. Last step is to develop a cap rate and divide to come up with value. There are also multipliers that take into account the gross income. The last approach is the cost approach (used for atypical properties such as churches, schools or new buildings). The first step is to come up with a land value then calculate the cost of the structure brand new and subtract the depreciated value of the improvements. Next you would add the land value + the depreciated value of the improvements to come of with value.

Answer 5

Flyer's response is pretty good. I would add that I track local property values on realtor.com. This information comes from the multiple listing services in your area. It covers the "asking price" for most homes on the market. It doesn't give you a serious "comp," but it tells you what seller expectations are.

I keep a simple Excel spreadsheet and update it every other month. I pay particular attention to seller expectations in the price range where my home should be. For example, if my 5-bedroom, 5-bath home should be worth $2.25 million, I select asking prices between $2 mm and $2.5 mm. I then track approximate price per square foot. For example, in our area homes of our size should be priced around $600 per foot. Smaller homes will be priced in the $750 per Sq Ft range. I can then back into the approximate Sq Ft of each home. Occasionally I go look at one to be sure my model is working. As you see, I take this seriously. It's an important part of our life.