How is Real Estate Appraised?
Whether you are a seller a buyer you should know this information! As a seller you need to know that factors that are contributing to your properties valued and as a buyer you should know what factors play into the value of a property.
There are three factors that appraisers use to determine the value of a property and here they are.
Cost Approach The cost approach considers the replacement cost of a building if it were reconstructed today. It considers today's construction costs, factors in the age of the building, other negative attributes that will take away from the value of the home to determine how much it will cost to replace the home today. The final value from this approach is based on construction cost - 2% approx per year for loss in building value - any other factors that detract from value (termites, roof damage, etc.)
Sales Comparison Approach This approach considers what other comparable homes are selling for on the market. This approach helps determine what homes similar to the subject property have sold for in the current market. The final value of this approach is an average of similar properties that have sold with a defined period of time.
Income Approach This approach is only considered to determined what a property can rent for in the current market. After factoring the annual income of the property less any associated expenses to maintain the property. The final value of this approach comes from the net income of the property which, depending on the zoning may use a divisible of 8-10% for the gross price result. i.e. A duplex bringing in $2,000 per month net would be worth $200,000 using a 10% divisible. While all these approaches will garner a different value, the average of applicable approaches are used to determine the fair market value for the property.
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