“How
Appraisers Determine Home Value?”
Before any property transactions, determination of the
accurate property value is a must. The appraiser’s job is to value the property
based on location, condition, area, time, marketability and liquidity to know
how much the property is worth. Market value and sale price may differ. Buyers
and sellers negotiate depending upon the how quickly the transaction needs to
be completed.
But how do appraisers determine the home’s value? This
is a fair question that everyone performing property transactions should know. This
is done so that the accurate value is determined so that the sale price is
neither undervalued for seller nor overvalued for the buyer. Three popular
methods used by appraisers are given below.
1. Income Approach
Schools or churches are better rented than sold. Under
this, appraisers take into account the income stream that the property is
generating. This method is most commonly used for rental properties or investment
properties that generate a monthly cash flow stream.
Example:
A home is sold
for $250,000 and is rented for $250 per month.
The Gross Rate
Multiplier (GRM) is 250,000/2500 = $100
Assuming it is consistent with other properties, the
GRM for the area is 100.
Thus, if any rent in that area is 300, its value is
300*100=30000
Alternative method,
Annual rent= $2000*12= $24000
Capitalization rate= 10%
Value of property= $2400/.1= $240,000
2. Cost Approach
This approach compares the replacement costs of the existing
building with one that can be newly constructed at the existing market price.
In other words, how much it will cost to build a new or unique home similar to the
one you are buying. Initially, sight value is considered as the value of the
land without a building. Whatever happens to the building, the land will remain
the same. Then the cost of building at the current cost of materials is determined.
The following questions must always be considered when
performing an appraisal using this technique. How much capital is required to
build the property? How much labor cost is required? Extra costs like garages,
parking areas and all direct and indirect costs are calculated. The depreciation
value items such as carpeting, roof materials are deducted. This is done
because land appreciates, but man made buildings depreciate over time.
Example:
2000 sq. foot area
Average price to build house today= $100 per sq. foot
Total cost= 2000*$100= $200,000
Depreciation=10%
Depreciation amount= $20,000
Net cost=200,000-20,000= $180,000
Land cost= $50000
Total value=180000+50000= $230000
3. Sales Comparison Approach
This is a comparison based on similar location, square
footage, physical properties, income stream and so forth. The house is compared
to sales that have occurred recently. For instance, a home near to you recently
sold for $200,000. If your home is virtually identical to this home. Then it
will be approximately worth the same amount. At least 3 recently sold homes
need to be taken into consideration.
At first, sort and organize information on the basis
of similar properties. Choose similar and recently sold homes. Appraisers are members
of the Multiple Listing Services (MLS). They can access currently listed buying
and selling accounts. The more up to date and comprehensive the information,
the more accurate the appraisal is likely to be. Public information at the recorder
office and courthouse can provide required information.
Example:
A home recently sold for $200,000, a home identical to
it in that area will be approximate $200,000. If your home has 3 garages and he
has only one, suppose the garage cost is 10,000. Then your home worth 200,000+20,000*2=
$240,000
Each of these approaches has its own pros and cons.
The appraiser must use the appropriate one or all the above methods according.
Finally, reconciliation can be done to come up with the actual value while comparing
each of the methods. If you are buying or selling your house, these tips can be
helpful for you to ensure that you get an accurate valuation of your property.
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