The basic tenet of real estate investing is to buy low and sell high. While that may seem simple enough, determining the actual worth of a property is not always easy. Several factors are in play, including the current state of the property, the extent of repairs or renovations required to make the property ready for the proposed use, as well as any zoning regulations that may affect the property.
Despite these factors, appraisers rely on three primary methods to establish the market value of a property. This post will briefly highlight them.
Sales comparison approach – This approach reviews properties of similar size and attributes to reach a comparable value for the subject property. Simply put, an appraiser will generate a group of “comps” and vary the subject property’s value based on what it may (or may not) have compared to the other properties.
Cost approach – As we alluded to earlier, a property may need extensive repairs or renovations before being ready for use. This is why appraisers may use the cost approach to value a property. Like the name suggests, the costs of rebuilding or replacing a building (after deducting for appropriate depreciation) are used to determine the appropriate value.
Income approach – For properties that generate income, this approach may be used to substantiate a property’s value and to properly classify it among worthy comparables. This approach is commonly used to value apartment complexes and other multi-family housing units.
If you have additional questions regarding valuation approaches or the legal implications of each, an experienced real estate attorney can advise you.