Whether you hire a professional Appraiser, compare your property to other properties or use the variety of online tools available, determining your properties’ value is vital when selling or refinancing.
If you wonder what your house or a house you want to buy is really worth, there are many ways to determine it. But where does this value come from? The simple answer is that a property is worth what someone would be willing to pay for it. The more complex answer is that the value is broadly determined by the market and who you’re asking – an agent, lender or assessor in the area.
Working out the value of a property will be necessary to sell, buy or refinance a property but could help you beyond that as well; giving you information to potentially lower property taxes and more.
What is an Appraisal?
An Appraisal is an estimate of a property’s fair market value. It’s a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
The Appraisal is performed by an “Appraiser” typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.
What are Appraisal Methods?
There are 3 common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all 3, a final value estimate is correlated. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.
- Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
- Sales Comparison Approach – The Appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.
- Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.
Why is knowing the value of a property important?
Working out your property or another properties’ value can provide you invaluable information that can help you determine if the property is priced appropriate and ready for a refinance or more.