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A real estate appraisal is necessary in virtually every real estate transaction that involves any sort of outside financing, bank loan, or other capital. An appraisal allows a lender or an investor to get an independent third-party opinion on the value of a piece of real estate.
A few things to note about an appraisal:
It is not the actual value of a property. But in fact, an appraisal is an opinion of value of an independent, neutral third party based on an arm's length transaction. That means two parties that are not related to each other under normal market conditions. And appraisal represents the appraiser's opinion of the most probable price or value under competitive market conditions.
There are three different approaches to determining the value of a piece of real estate. There's the sales comparison approach, there's the cost approach, and the income approach.
All three are typically used, and then a weighted average of the three is taken to come up with the appraiser's opinion of value. But each approach definitely has its place for certain types of real estate or certain types of transactions.
The sales comparison approach is the most common type of approach used to value residential properties. And what it does is it compares the subject property or the property being appraised to similar or comparable properties that have recently sold or been marketed in the neighborhood in the area, or in some way are comparable to the subject property.
The appraiser takes a look at the properties that have recently sold. And then makes adjustments for the differences between those properties and the subject property. Once all of those adjustments for similarities and differences have been made, then the appraiser will average out what they think is the most likely price for that property to sell in competitive market conditions.
The next approach is the cost approach. The cost approach to valuation is often done with new construction or highly specialized properties. And it's fairly simple. What it takes is the, what it would cost to build the exact same property, new in today's dollars minus any depreciation that's applicable for the properties age, and then add the value of the land itself.
Depreciation from new to current can come in many different forms.
Physical depreciation would just be the aging of the building wear and tear. Things like that. Functional depreciation would be depreciation for the use that is best suited today. Versus when the property was built. For instance, small single family homes that have three bedrooms and only one bathroom.
Might be functionally depreciated compared to modern homes that would have more than one bathroom for that many bedrooms. There's also external depreciation, which is depreciation that affects the value of the property for things that happened external to the property, such as, uh, building a freeway, uh, adjacent to the land or major changes in nearby zoning laws.
The final approach to valuation is the income approach. And that is. Capitalizing the net operating income from piece of real estate using a market cap rate to determine the value of the property. The income approach is the most effective and most widely used for investment or cash flowing properties, as opposed to new construction or single-family properties.
Appraisers will typically use a couple of different metrics, including rent, multipliers, and most importantly, the net income divided by the cap rate, or the income capitalization.
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5 окт 2024
