Property appraisal
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Property appraisal is a process of estimating the value of a real estate property. Property appraisals are conducted by professional appraisers who are required to be licensed in the jurisdiction they are appraising. Appraisals are used to determine the value of a home for sales, financing, or taxation purposes.
Example of Property appraisal
Property appraisals involve four main steps:
- Comparative market analysis: The appraiser compares the property being appraised to other similar properties in the area to determine its worth.
- Cost approach: The appraiser estimates the cost of replacing or reproducing the property to determine its value.
- Income approach: The appraiser estimates the value of the property based on its potential income.
- Sales comparison approach: The appraiser compares the sales of similar properties to determine the value of the property being appraised.
Formula of Property appraisal
The formula for property appraisal is the Market Value Estimate (MVE) = Market Value Factor (MVF) x Land Value (LV) + Building Value (BV). The Market Value Estimate is the appraised value of the property. The Market Value Factor is the ratio of the comparable sales price to the appraised value. The Land Value is the value of the land the property is situated on and the Building Value is the cost of the building and any improvements made to the property.
When to use Property appraisal
Property appraisals are commonly used in a variety of situations, including:
- Sales: Property appraisals are used to determine the market value of a home for sale.
- Financing: Banks and other lenders use appraisals to determine the value of a home for loan purposes.
- Refinancing: Appraisals are also used to determine the value of a home when refinancing a mortgage.
- Taxation: Local governments use appraisals to set the tax rate on a home.
Types of Property appraisal
There are three main types of property appraisal: market value appraisal, investment value appraisal, and special use appraisal.
- Market value appraisal: This type of appraisal is based on the current market value of the property. The appraiser looks at recent sales of similar properties and factors in any improvements that have been made to the property.
- Investment value appraisal: This type of appraisal is based on the potential return on investment for the property. The appraiser considers factors such as rental income, capital gains, and cash flow to determine the value of the property.
- Special use appraisal: This type of appraisal is used to assess the value of a property for a specific purpose. For example, this type of appraisal may be used to determine the value of a property for a proposed development or to assess the value of a property for taxation purposes.
Steps of Property appraisal
Property appraisal involves four main steps: identification of the property, collection of data, analysis of data, and estimation of value. The appraiser identifies the property by obtaining information about the location, physical characteristics, and ownership rights. The appraiser collects information about the property such as sales data, comparable properties, and economic trends in the surrounding area. The appraiser then analyzes the data collected to determine the value of the property by examining the property’s condition, quality of construction, and market trends. Finally, the appraiser then estimates the value of the property based on the analysis of the data.
- Identification of the property: The appraiser identifies the property being appraised by obtaining information about the location, physical characteristics, and ownership rights of the property.
- Collection of data: The appraiser collects information about the property such as sales data, comparable properties, and economic trends in the surrounding area.
- Analysis of data: The appraiser then analyzes the data collected to determine the value of the property. The analysis includes an examination of the property’s condition, quality of construction, and market trends.
- Estimation of value: The appraiser then estimates the value of the property based on the analysis of the data.
Advantages of Property appraisal
There are several advantages to property appraisal:
- Accuracy: Property appraisal is a reliable way to determine the value of a property because it is conducted by a professional appraiser who has knowledge of the real estate market and property values.
- Flexibility: Property appraisal can be conducted for different purposes such as sales, financing, or taxation.
- Objective: Property appraisal relies on objective data and analysis to determine the value of the property, so it is unaffected by personal opinion or bias.
Limitations of Property appraisal
- Appraisals are based on estimates: Property appraisals are based on estimates of the value of a property, rather than a definitive number. Appraisals can be inaccurate if there is a lack of data or if the appraiser makes incorrect assumptions.
- Subjectivity: Property appraisals are based on subjective opinions of the appraiser. Different appraisers will have different opinions about the value of a property, which can lead to discrepancies in the appraised value.
- Market fluctuations: Property appraisals can be affected by market fluctuations. If the market suddenly changes, the value of the property may be different than the appraised value.
Besides the approach of property appraisal mentioned above, there are other approaches to evaluate the value of a real estate property.
- Cost approach: This approach is based on the principle that the value of a property is determined by the cost of replacing it. The appraiser determines the current cost of labor and materials to construct a similar property, and then deducts depreciation from that cost to arrive at an estimate of value.
- Income capitalization approach: This approach is based on the premise that the value of a property is determined by the income it generates. The appraiser estimates the net income the property will generate and then capitalizes it by a rate of return to arrive at an estimate of value.
- Comparison approach: This approach is based on the principle that the value of a property is determined by comparing it to other similar properties. The appraiser will look at comparable properties that have recently sold and use those sales prices to arrive at an estimate of value.
In conclusion, Property appraisal is a process involving the evaluation of a real estate property that can involve a variety of approaches including cost, income capitalization, and comparison.
Suggested literature
- Cho, M., & Megbolugbe, I. F. (1996). An empirical analysis of property appraisal and mortgage redlining. The Journal of Real Estate Finance and Economics, 13, 45-55.
- Sayce, S., & Ellison, L. (2006). The sustainable property appraisal project. Kingston University.
