As a certified provider of over 3000 broker price opinions to banks, special asset divisions and asset management companies we are well versed in the following three types of real estate appraisals.
A real estate appraisal is a vastly important component in a real estate transaction. The value determined is often used for financing or refinancing, and in addition, for HELOCs and lines of credit. There are three fundamental types of real estate appraisals that may be used, the “cost approach,” the “sales comparison approach,” and the “income approach.”
Over the years, the “cost approach” also known as the “summation approach” Is an appraisal which values the land less any depreciated improvements. The improvements refer to new construction costs on the land in today’s standards. Most real estate appraisals using this method will start with a replacement cost and then subtract value for any issues relating to the land or issues to the improvements on the land. This type of real estate appraisal is considered to be most effective on properties with newer structures as opposed to properties with older improvements that may be suffering from functional or economic obsolescence.
The “sales comparison” real estate appraisal is often performed in combination with one or both of the other forms. This approach compares the price per square foot of similar properties, within the same neighborhood or within close radius, to the subject property. As an example, an appraiser will be present a list of properties that are similar in size, age, condition and amenities, to include an itemized comparison, in brief narrative form, to the subject property. The price variations are averaged to create a fair market value for the property being appraised. This type of real estate appraisal is considered the most reliable and accurate appraisal as it utilizes recent market values on similar properties.
The “capitalization approach” to real estate appraisal or valuation is also referred to as the “income approach” and is typically used for commercial properties. This type of appraisal uses analytics to predict the behavior of market participants of income producing investment properties. When deciding to purchase an investment property, most commercial real estate investors are interested in the income possibilities or historical income performance data, quantified by a capitalization rate. This type of appraisal is more technical and in depth than a residential appraisal and requires an appraiser with additional training, experience and credentials. When purchasing either a commercial or residential property, a real estate appraisal or market valuation is a standard procedure. Enabling both parties in the real estate transaction to understand the fair market value of the subject property.