Property appraisal, as cool as it sounds, is not a magical art form of guess-timation and strong opinions. There also isn’t one foolproof way to determine a property’s “value” – because properties are valuated for lots of reasons, and the cards you’re handed are always a little different. There are a few approaches appraisers use to determine the value of a home, and each of them has its own time and place.
Factors Affecting Property Value
Appraisal is the big brain of the real estate industry. There are a lot of factors and data at play in a market that is constantly changing. Here are the main ingredients in the real property valuation stew:
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Location and local markets
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Size, land value, and zoning regulations
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Age and building systems
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Condition and construction materials used
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Features both standard and unique
Appraisers consider these factors and more while collecting data on a property. However, some factors are more important than others, depending on the approach used to determine the value.
Market Approach
This is the method you might envision: an appraiser goes to a home and compares its age, condition, and features to similar properties in the area. They will look for sales data from similar properties, consider differences, and then come up with a reasonable figure for the “market value.”
This is the market approach, and it is the most common way to appraise real property. It’s a straightforward and objective method, and it works best when there is enough data and comparable properties to give a wide range of values.
Cost Approach
If there aren’t many comparable properties in the area, or the property in question is a new and unique build, an appraiser might go in with the cost approach. This approach is also useful for insurance and land valuation. So, if a tornado rolls through town, the appraiser will have a good estimate for how much rebuilding a home from the ground up will cost. For this method, an appraiser will consider the following factors:
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Construction costs
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Cost of materials, labor, and land value
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Local market conditions
Income Capitalization Approach
The income approach is the third primary method for real property valuation, and it’s exactly what it sounds like: a method to place a value on income-generating properties. Unlike the two before, this method focuses heavily on a property’s earning potential. Rather than looking at cost of materials and market prices, the appraiser will consider:
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Local rents and vacancies
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Net operating expenses (NOI)
Some of these methods feel like a mathematician peering through a crystal ball, but for appraisers, it’s all in a good day’s work.
Combination Approach
Naturally, one way isn’t always the only way to go. This is especially true when dealing with complicated properties, new developments, or homes that are straight up bizarre.
Also, using a combination approach will help get the most comprehensive and credible valuation. It’s one of the best ways to avoid appraisal biases, too.
There’s a Method to the Madness
Every job has its method to the madness. In appraisal, there is more than one way to get the job done, and sometimes using a combination of valuation methods is the best way to go. But finding this perfect combination, considering all the most important factors and features of a property, and weighing the nuances before determining its value...that's the reality of an appraiser's job. It’s all about the puzzle, the strategy, and the determination to find the best answer possible in a world where no answer is easy to find. Sound like you? Don’t be shy. Learn more about becoming a real property appraiser in your state.
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