Estimating the value of the certain property is indeed very important to a wide variety of endeavors. These include real estate financing, investment analysis, listing real estate for sale, the taxation of real estate, and the insurance of the property. For most individuals, determining the asking price of a certain property is considered the most useful application in terms of real estate valuation.
The real value of the property is being affected by several important factors. The economic and social trends must be considered. Apart from that, you must also take into account governmental controls or regulations and environmental conditions that might influence the 4 elements of value.
4 Elements Of Value
- Transferability – This is the ease with which ownership rights are transferred.
- Utility – This is the ability to satisfy the desires as well as need of the future owner.
- Scarcity – This is the finite supply of competing properties.
- Demand – This is the need or desire for ownership that is supported by the financial means to satisfy the desire.
You must bear in mind that value is not equal to price or cost. Cost will refer to the actual expenditure like labor and materials. On the contrary, price is the amount that someone will pay for something. Although the cost as well as the price can affect the value, they do not actually determine the value.
Different Appraisal Methods
An accurate appraisal will greatly depend on the methodical collection of date. There are actually 3 basic approaches that are being used during this process in order to determine the value of a certain property.
Sales Comparison Approach – This is usually used in valuing single-family homes and land. It is otherwise known as the market data approach. This is the estimate of the value which is derived by comparing a property with recently sold properties with same characteristics.
Cost Approach – This can be used in order to estimate the value of houses that have already been improved by one or more buildings. This method will involve separate estimates of value for the land and the building, taking into account depreciation. The estimates will be added together in order to calculate the worth of the entire improve property.
Income Capitalization Approach – This is based on the relationship between the rate of return an investor requires and the net income that a property will yield. This is usually the approach used for commercial buildings like apartment complexes, shopping centers, and office buildings. This can be very straightforward if the subject property can be expected to have a future income, and when its expenditures are steady or predictable.
Written By: Larry Ransdell