Paul's Appraisal Blog

The Different Aspects of a Real Estate Appraisal, Part 2
September 13th, 2008 8:13 AM

    In a previous post, I talked about the first basic part of a real estate appraisal- the verification of the property attributes. In this post, I will talk about the determination of value.

    In any real estate appraisal, there are three approaches to value that can be used:

    One approach is the income approach, which determines the value of a property based on the amount of income it has brought in and is expected to bring in. This is usually used for income-producing properties such as multi-unit residential and commercial properties. It has very little application in primarily owner-occupied properties because there is no income.

    The next approach is the cost approach, which calculates the cost of constructing the building coupled with the value of the land. If the property is relatively new, this can be a fairly accurate way to find value. However, if the building or "improvements" (as we like to say in the business) are older, then the the calculations become less reliable. There is also the problem of determining a valid value of the site if there are no recent comparable land sales to use for the value. (By the way, on my home page there is a link to building which is a free service that will calculate the cost of building a home in your area - give it a try!!) 

    In residential appraisals of single family residences, (SFR's or Condos), the most commonly used method for determining value is the sales comparison approach. The concept is quite simple: Three or more recent comparable sales are found that are near the subject. The assumption is that if these comparable sales sold for $X, then the appraised property should also sell for $X.  The problem is that sometimes the "comparable sales" are not as comparable as one would like. They may be bigger, smaller, older, newer, in better or worse condition, have a better or worse location, etc.  When this is the case, then the appraiser has to make an adjustment to compensate for this difference. How do we know how much to adjust it for?  What we have to do is find two or more comparable sales that are only different by that one attribute that we want to adjust, and then see what the difference in price is. This is called a paired sales analysis and can be very eye opening.

    What many people don't understand is that we make an adjustment based on how the real estate market reacts to the improvement, not to how much it cost to put in.  For example, someone might pay $20,000 to put in a pool, but a paired sales analysis indicates that home buyer will typically only pay an additional $10,000 for a pool.  Someone might pay $10,000 to put in a new deck, while a paired sales analysis shows that home buyers really don't react at all to this feature- in other words, it really doesn't add much value. These are only examples and every area is different.  Pools in Oceanside near the ocean aren't worth as much as pools in, say, Palm Springs- for obvious reasons.

    So, I hope this helps people understand a little bit about the appraisal process. You can actually get a pretty good idea of what your home is worth by paying attention to the recent sales in your immediate area (in this market they shouldn't be more than 3-4months old with the same living area and within a half mile).  

    If you have any questions, feel free to give me a call or email. I'll try my best to answer them. Thanks for visiting my site!!

Posted in:General
Posted by Paul McEwen on September 13th, 2008 8:13 AMPost a Comment

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