Subjecting your property to an appraisal is the preliminary phase of selling. Whether it is your home or a commercial building, the evaluation is vital in many respects.
The value any appraiser provides for a property is used for more than just determining its sale price. The information generated by the process is beneficial even after the property is sold. Appraisals cover everyone involved in the process of selling property, from buyers and sellers, to banks, borrowers, brokers, and even insurance companies.
Despite all these benefits, appraisal is still a procedure real estate companies can't do online - at least not yet. Nevertheless, it is advisable to opt for a technologically enabled real estate agency. This provides an assurance that the agency not only utilizes the latest technology for their own processes, such as efficient software for accounting, but also has an online presence that facilitates instant communication and ensures regular updates.
There are three common ways a real estate agent appraises the value of your property. These comprise the comparison approach, cost approach, and income capitalization approach. Each of these is an approach that is used depending on the nature and viability of your property.
So how exactly do real estate agents determine the value of your property? Below are detailed explanations to help you understand their methods.
1. Comparison Approach
This strategy is the most popular way real estate agents measure a property's value. What they do in this approach is estimate the value of your property by comparing it with a similar property. This equivalent property is what they term as "comps", which is short for comparable.
To elucidate further, consider this situation. If you want to know how much a house is worth and a similar home has been sold next door, then that serves as a straightforward sign of the house's value.
Not much accounting is needed in this procedure. What most appraisers try to find are properties that are nearby, the most comparable, and have recently been in the market.
Additionally, appraisers take several factors into account while reviewing comparable properties. These are the following;
● Size of the property
● Lot occupied
● Age of the property
● Condition of the property
● Amenities that come with the property
● The desirability of the location
● Proximity to the property for sale
Because of these variations in comps, property appraisal is not an accurate science. So, do not be surprised when two real estate appraisers give you two different values for your property by using the same approach.
2. Cost Approach
Some agents may fail to find identical comps while using the comparative sales approach. This is because a house with no surrounding homes may be hard to value.
Also, unique properties, such as castles and restored churches, are often hard to appraise using the first approach.
In such cases, the cost approach is another real estate appraisal method that can be utilized. In the cost approach, the agent takes into consideration the present state of the property. The method relies on the concept that building a new property from scratch will lead to a beautiful and entirely new property, and that the property in question is certainly not in good shape. Thus, appraisers use depreciation methods that account for the cost of constructing a new property, less the value of your current property.
Any of the reasons listed by evaluators for depreciation include:
● Physical Deterioration Of The Property
This takes into consideration the evident deteriorating state of the roof, base, and other structural elements. It also includes obsolete mechanical systems, outdated appliances, and fixtures.
● Functional Obsolescence
This happens when the architectural design of a property becomes outdated, like having a structural layout where the only way to reach a particular room is by walking through another.
● Economic Obsolescence
Economic obsolescence of a property is determined by comparing your property to nearby buildings or structures that make the property less in value, such as a high-rise building constructed next to your property. The newly constructed building, with all its updated design and functionalities, will automatically make your property depreciate in value.
Income Capitalization Approach
Given cases where it is not possible to utilize the first two approaches to appraise your property, income capitalization may come in handy. In this approach, properties are appraised based on their income-generating capacity. In other words, real estate agents base their valuation on a property's profit potential while trying to maximize their sales.
There are two methods of achieving this - direct capitalization and multiplier of gross income.
For residential buildings and industrial properties, the direct capitalization approach is used. To evaluate the property, the assessor first determines the property's NOI (net operating income). This is done by summing up all annual rentals or income and subtracting expenditures. The value of the property is then estimated based on its NOI.
On the other hand, the gross income multiplier approach is used for properties earning rentals. The evaluator looks at the connection between neighborhood rentals and retail property values to decide how much they would multiply your property's value taken as a buying price. If they consider the usual income multiplier, agents can increase the cost for the property according to the multiplier and establish an average value.
In essence, real estate appraisal is a cumbersome process. So when pricing and selling real estate, it is always recommended to rely on a professional.
Bear in mind, though, that pitfalls and drawbacks can be encountered anywhere. It would be best not to place complete trust in your real estate agent for your property appraisal.
There are a wide range of options that could help you make your appraisal. Tried and tested methods are always available to help you avoid making errors and getting the most out of your property.