3 Common Approaches to Appraisal Value

Three Approaches to Appraisal Value

There are three common methods of determining appraisal value. Home appraisals
incorporate established techniques and methods to arrive at consistent and reliable
valuations. Appraising relies on these three approaches to determining value for any given
piece of property: sales comparison approach, income approach, and the cost approach.
These methods vary based on the type of property you are purchasing.

Sales Comparison Approach

The sales comparison appraisal approach is used for standard, single-family homes, and is
the most commonly relied up and sought after in the residential lending industry. This
approach looks at the sales of other similar properties. They are compared/contrasted, and
based on their similarities and differences, an appropriate value is derived. This method
ensures a fair value is determined for the home within the market and aids banks in their
lending decisions by providing them with an unbiased opinion of fair market value for the
collateral backing a given mortgage loan. This approach is also often used by realtors and
homeowners in determining list price for a property going up for sale. Overview of neighborhood

Income Approach

The income approach is implemented primarily to evaluate properties that have income
potential, such as rental apartment buildings, office buildings, or shopping centers, but is
also used in residential real estate when a property is going to be tenant occupied. The
theory behind this method of appraisal value is that a property’s value is a function of it’s
potential to bring income. Properties can command a specific amount in rent and will also
have certain expenses which will need to be taken into consideration.

A residential real estate appraiser will often use the Gross Rent Multiplier or GRM for
estimating value. GRM uses the gross rentals of a property. This calculation can be done in
one of two ways using either gross potential income or gross operating income. The value
estimate is better using the gross operating income because losses for occupancy and non-
payment are taken into consideration.

Cost Approach

The cost approach is the easiest but least used method of appraisal value. This method is
typically used for commercial property that will not be used as an income property, or larger
properties that have to be built from the ground up or drastically remodeled.

The land and property are assessed separately in the cost appraisal approach, in order to get
an understanding of what the overall value would be. The depreciation that could take place
over time is then taken into consideration and subtracted from the value amount. Lastly,
similar existing buildings will also be assessed to ensure the value is on par in comparison to
other properties.

For residential real estate appraisals, one, two, or all three approaches to value may be
employed and your appraiser should reconcile the methods employed before determining
their final value opinion.Keys with home keychain

There are many reasons to receive an appraisal from Definitive Valuations to include:

  • Determining list price for the sale of your home
  • Getting an unbiased opinion to confirm value for a cash sale
  • Reduce property tax obligations when a property is valued too high by your taxing authority
  • Valuation needed to deal with an estate
  • Determine honest property value for other financial or litigation needs

No matter the reason, Definitive Valuations is here to help. Contact us today!


 

Definitive Valuations is North Alabama’s premiere appraisal firm. Our mission is to provide
superior valuation and consulting services in Huntsville, Alabama, and surrounding areas.
Our staff strives to understand your needs and to provide the best solution for your
situation – whether for financial planning, relocation, tax dispute, legal matters, pre-listing,
or any other purposes. Discover more here.

The Importance of Previous Purchases to Appraisers

How much weight do appraisers put toward previous purchases when completing a home
appraisal? Often times, looking at the past can help us understand the present. It’s
important to consider the factors that impact a previous purchase in the ever-changing
market of real estate.

An appraiser is required to analyze and report the past 36 months of transfers of the subject
property. Analysis of a prior sale can be normal and even mandatory in the appraisal
process.

If a property sold at a reasonable price, an appraiser could give strong weight to that sale. In
this scenario, an appraiser will take a closer look at exactly how the market and property
have changed since the sale.

On the other hand, a previous purchase could be considered meaningless if a property sold
for too little or too much in the past. In this case, an appraiser will not give real value weight
to this type of purchase.Outside of two-story home

When the Previous Purchase Means Less

Trustees Sale

This type of sale tends to go for a discount. Properties are typically not in great condition in
this scenario.

Fixer-Upper

If a home was in need of significant work, it most likely sold at a lower price. Chances are,
the home received major upgrades since the previous purchase. In this case, the previous
purchase value means less.

Family Discount

If a home was sold between family members, it is likely the previous purchase price will not
be a reliable source of information for today’s market. These types of sales often include a
discount to the actual value.Living room and kitchen of home

Factors to Consider

Timing

Before giving weight to a previous sale, an appraiser will assess whether it was a reasonable
representation of value at the time.

Context

Often times, a previous purchase is an incredible way to understand how a property fits into
the market. If a subject property has competed at approximately the same price position
within the previous three sales, an appraiser will likely give strong weight to those previous
sales. This helps one understand value for that particular property.

Adjustments

A prior sale can help determine how much the value should adjust for certain features of
the property. Is the home located on a busy street? A previous sale gives insight into
whether this was a big deal or not compared to surrounding neighborhood sales. This
research is effective insight into seeing what buyers have been previously willing to pay for.

Current Market

An appraiser will be objective by giving the most weight to the current market. You should
not get stuck on the previous purchase price and forget about the current market. Values
could have increased or softened since that previous purchase. The market could be
different today due to things such as:

  • Change in zoning
  • Change in buyer demand
  • Gentrification

No matter the previous purchase price, it is important to compare that to today’s market.

Previous purchases help appraisers to uncover how any recent improvements or changes
impact the overall value of the property. However, no matter the history of the property,
it’s important to consider all factors that impact the overall value in the ever-changing
market of real estate.


 

Definitive Valuations is North Alabama’s premiere appraisal firm. Our mission is to provide
superior valuation and consulting services in Huntsville, Alabama, and surrounding areas.
Our staff strives to understand your needs and to provide the best solution for your
situation – whether for financial planning, relocation, tax dispute, legal matters, pre-listing,
or any other purposes. Discover more here.