The purchase of a new home supports the construction industry, and adds to the tax base of local government, either thru direct property tax, or by increased sales tax as local residents buy goods and services from nearby business. These nearby businesses are usually required to pay a sales tax on transactions, which increases revenue to local government. In this way, a robust market for real estate contributes significantly to the local, state, and national interests.<\/p>\n\n\n\n

Real Estate Appraiser<\/h3>\n\n\n\n

Home or residential real estate appraisers are hired to provide an opinion of value about residential property. Appraisers do not create or establish value – only buyers establish actual market value as evidenced by their purchases. Appraisers simply try to understand how buyers would look at a subject property, and estimate a value based on evidence from these buyers. <\/p>\n\n\n\n

<\/figure><\/div>\n\n\n\n

Automated Valuation Model<\/h3>\n\n\n\n

Automated Valuation Models (AVM\u2019s) are computerized algorithms written to process property data to concluded various statistical data, including property value. These AVM\u2019s offer quality control and analysis, audits, refinance value and other information. These technologies compete with traditional appraisals, resulting in fewer appraisal assignments. However these technologies are criticized for offering lenders an opportunity to select the highest value estimate from the various AVM\u2019s. With high value estimates, lender\u2019s can offer larger mortgages with the justification that the property has the collateral needed to pay back the loan if they have to foreclose. This is the same mentality that contributed to the S&L melt down of the 1980’s, and the subprime mortgage crisis of 2007-2008, which drove the Great Recession that followed.<\/p>\n\n\n\n

Comparable Properties<\/h3>\n\n\n\n

Appraisers use three traditional valuation approaches to determine value, (cost, sales and income). To determine value, the appraiser must select comparables with similar economic characteristics. The comparable should appeal to the same buyer\u2019s that would consider the purchase of the subject property. It should be in the same market area and ideally has sold recently. <\/p>\n\n\n\n

Cost Approach Appraisal<\/h3>\n\n\n\n

The cost approach is based on the reasoning that a buyer would not pay more for a property than it would cost to purchase land and build improvements of similar quality and condition. For an appraiser to develop a cost approach, they need to consider:<\/p>\n\n\n\n

<\/figure><\/div>\n\n\n\n

• Land value of a site.<\/li>
• Direct and indirect costs of the improvements. Direct costs are money to be spent for materials and labor. Indirect costs include management costs, architectural and engineering fees, permits, financing costs, insurance, sales and lease-up costs, etc.<\/li>
• Entrepreneurial Incentive. This means that nobody works for free. If you are a developer, and you are going to put the work into a new build, you are going to want to be paid for your effort. <\/li>
• Depreciation. There are three major categories of depreciation which are physical, functional and external. Physical<\/strong> depreciation focuses on the age of the building. A new build is probably in better physical condition than a property that is 50 years old. Functional <\/strong>depreciation deals with improvements that are outdated compared to modern builds. Perhaps the A\/C system is inadequate, or the property has a pool that is no longer adding value to the property. External<\/strong> depreciation are factors outside of the property boundary, (the property is near a landfill and nobody will buy it).<\/li>
• Reconcile the above into a single value estimate for the cost approach.<\/li><\/ul>\n\n\n\n

  Sales Comparison Approach<\/h3>\n\n\n\n

  <\/figure><\/div>\n\n\n\n

  The sales approach is the most reliable and direct value approach for most real property, (if there have been sales). The sales approach is simple, uses market data, is applicable in most situations, and is widely understood by the general public.<\/p>\n\n\n\n

  • Use sales, listings and pending offers from properties that are similar to the subject.<\/li>
  • Find relevant units of comparison for analysis, ($\/SF, $\/unit, $\/acre, $\/bedroom, etc)<\/li>
  • Compare the comparables to the subject in terms of the various elements identified above, and adjust the sales price of the comparables to reflect how they differ from the subject.<\/li>
  • Reconcile the above into a single value estimate.<\/li><\/ul>\n\n\n\n

    Income Approach<\/h3>\n\n\n\n

    The income approach to the valuation of residential property is applicable when there is an active rental market, and when the typical buyer would consider rental income in their decision to purchase. It is based on the assumption that property value is related to the properties ability to produce income. The most common technique for valuing a single residential property from the income approach is to use a multiplier on the income, (usually a Gross Rent Multiplier or GRM).<\/p>\n\n\n\n