The primary function of real estate valuations is to determine a property value. However, what the market will pay for your house is often different from what you feel it is worth. Do you know what methods your real estate appraiser is using to determine your home’s value? Understanding the primary methodologies involved in valuation can be very beneficial whether you are selling, or buying. There are three main methods used to determine real estate value, otherwise called the “approaches to value”.
The Sales Comparison Approach
The sales comparison approach is most frequently used in real estate, and it is based on determining what other properties have sold for recently in the immediate vicinity. Methods like trend analysis, market surveys are employed to carry out such comparisons. This method relies on judgement calls to a certain extent, as a certain real estate feature may be differently valued and different areas. Nevertheless, it is still considered to be one of more advanced methods.
The Cost Approach
This valuation method is based on calculating the costs if the property had to be replaced or reproduced, and taking into account accrued depreciation. The cost approach also requires assumptions, but it is considered a more reliable method in the case of newer properties being evaluated.
The Income Approach
The third approach is used when the real estate is generating income for its owner. Some examples may include offices, apartment buildings, and similar rental properties. If income approach is used for a real estate valuation, the appraisers will take into account the value of revenue derived from such property to determine the final calculation.
Even though these three approaches are most frequently used to perform the appraisals, other methods, such as risk or geographically based, are sometimes used too. The person carrying out your real estate valuation can choose from these approaches to determine your house’s value. Each approach has its benefits in different circumstances.
Finding out what your property valuation is based on may help you get a better idea of why it is valued at a certain price. The approaches above are most often the deciding factors in how your real estate valuation is going to go, thus gaining a better understanding of them can prove to be beneficial when your property is up for an appraisal. Get a property valuation report!