What Is Not Real Estate Value
The value of real estate is not the same as the assessed value of real estate, nor is it the same as the price of real estate. Whereas, the price of real estate is defined by what the buyer will pay for the property. Price is affected by market demand, bargaining skills, purchase incentives or a special relationship between buyer and seller.
Assessed value is a number assigned to a property by the state to assist in assigning and collecting property taxes. Assessments lag behind the market, because they are only updated at the beginning of each calendar year. Moreover, assessments are based largely on previous transfers of the same property, no matter how long ago the property sold.
Real Estate Value
Real estate value is an estimate of what the property is actually worth. Real estate value is determined through the process of real estate appraisal. Real property appraisal is complex, as every property differs in type, character and location. All real estate is local, and the market changes frequently.
The value of real property is most commonly referred to as "market value." Market value is essentially the highest price a buyer will pay for property in the current market. Market value assumes that the buyer is selling the property in its current condition and that the property will be sold quickly, generally within 30 to 90 days. Theoretically, if the property is not sold within a reasonable period of time, the property has been valued and priced too high.
There are various methods for estimating market value. The appraiser selects the most applicable and useful method, taking into consideration the scope of work, type of property and the quality and quantity of data available for each approach.
The Comparable Sales Approach
The most common and widely accepted method for determining the fair market value of residential real property is through the comparable sales method or historical approach. Using the comparable sales method, an appraiser will review and analyze the sales histories of comparable properties. For an accurate valuation, the appraiser should only include properties of similar size, age and style that have sold in the same or a very similar and nearby neighborhood. The appraiser should include only the most recent sales, preferably sales that have occurred within the last six months. For each property used in the analysis, the appraiser divides the sales price by the number of square feet to determine an average cost per square foot for comparable properties. The average cost per square foot can then be multiplied by the number of square feet in the subject property to produce an estimated fair market price.
The Cost Approach
The cost approach assumes that a buyer will not pay more for property than he would spend to purchase vacant land and construct improvements with similar quality and utility. The cost approach begins with an appraiser comparing vacant lots with similar zoning and location to determine the market value of the land. The appraiser then determines the cost to construct new improvements with similar utility but using modern materials and workmanship. The value of the land and cost of improvements are added together and then adjusted to account for depreciation. The cost approach is reliable for new structures, but becomes less reliable for older properties subject to greater depreciation.
The Income Capitalization Approach
The income capitalization approach is the most common valuation method for commercial and investment property. The income capitalization approach is based on an expectation of future benefits and the cost of selecting one investment over another. The appraiser compares the net income the property would earn if rented out over its remaining useful life with the income that could be earned if the money invested to purchase the property had been invested in a different venture. To do so, the appraiser multiplies net income by a market-based capitalization rate to determine the investment value of the property. Net income is the gross potential income of the property less vacancy and collection loss and operating expenses. The capitalization rate is the expected rate of return on the investment, derived by comparing sales of similar investment properties.
Other Valuation Methods
Commercial and rental properties are subject to other valuation methods, including but not limited to the following:
Value in Use:
Cash flow generated for a specific property owner, when the property is used for a specific purpose.
Insurable Value:
The value of property covered by insurance, which generally includes the value of the structures but not the land itself.
Liquidation Value:
The value of property if the owner is forced to sale in the current market in less than 30 days.
When you are in the market for real property, it is important to understand the difference between the listing price, the assessed value and the actual value. Uneducated realtors can add confusion to the buying process by speaking of market value as the assessed value or price. The most common reason why people pay too much for property is lack of information.
Martin Dolemo is the highly experienced owner of Saxony Real Estate. They are dedicated to helping his clients understand the real estate market. Whether you are looking for your dream home, a vacation home or an investment property, the Saxony Real Estate team can help. For more information, please visit http://www.saxonyrealestate.com/
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