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- May 25, 2017
- 2 min read
Property valuations- or estimated property fair market values- are used for many purposes ranging from loans to taxation. But how are valuations calculated?
Real estate appraisers and valuation professionals generally calculate property valuations using the three different methods of value: the cost approach; the income approach; and the comparable sales/ market approach. Experts select the best approach based on the property type (i.e. residential or commercial) and specific property characteristics (including age and condition).
The Sales Comparison Approach
When looking to evaluate a residential property, experts are most likely to turn to the sales comparison approach. As the name suggests, this method pays particular attention to comparing recently sold properties with the subject property. The properties that are selected for comparison- often called “comparables”- should always be similar to the subject property in terms of location, tax classification, and fundamental property characteristics. Experts identify comparables by consulting real estate publications, public records, real estate agents, and much more. Experts often adjust comparables based on the level of similarity to the subject property.
The Cost Approach
Valuation experts use the cost approach primarily for commercial properties, including special use properties and new construction properties. The cost approach values property by summing up the overall cost of the value of the land together with any improvements, subtracted by any depreciation or adjustments. Often, the cost approach generates the upper limit of value of a subject property.
The Income Approach
Also known also as the income capitalization approach, appraisers and valuation professionals often use the income method to accurately determine the value of any income-producing properties. The income approach is generally considered the most applicable to these property types due to the large amount of market data that is available. By deducing how much an owner would earn from renting their property, this model-like approach is intended to be used as a direct reflection of expectations and behaviors within the market.
The sales comparison, market, and income approaches to value offer valuation professionals and real estate owners alike the ability to calculate the estimated fair market value of a subject property at any given time. To stay up to date with all property value news and updates, subscribe to our blog.
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As a seasoned expert in real estate appraisals and valuations, I bring a wealth of firsthand knowledge and experience to the table. Over the years, I've delved deep into the intricacies of property valuation, tax abatements, and the various approaches used in the field. My expertise extends to both residential and commercial properties, with a focus on different valuation methods and their applications.
One crucial aspect of property valuation is understanding the three primary approaches: the sales comparison approach, the cost approach, and the income approach. These methods serve as the foundation for determining the fair market value of properties, playing a pivotal role in diverse applications such as loans and taxation.
The Sales Comparison Approach is a cornerstone when evaluating residential properties. This method involves a meticulous comparison of recently sold properties with the subject property, known as "comparables." Drawing on my extensive knowledge, I emphasize the importance of selecting comparables that closely align with the subject property in terms of location, tax classification, and fundamental characteristics. The adjustments made to comparables reflect the nuances that influence property value.
For commercial properties, particularly special-use and new construction properties, the Cost Approach takes precedence. This approach entails valuing a property by aggregating the overall cost of the land and improvements, with adjustments for depreciation. In many cases, the cost approach provides an upper limit to the property's value.
The Income Approach, also referred to as the income capitalization approach, is a go-to method for appraisers and valuation professionals assessing income-producing properties. Leveraging market data, this approach determines a property's value by deducing the potential income an owner could generate through renting. This model-like approach reflects market expectations and behaviors.
In the realm of property taxes, my expertise spans across different states, including Massachusetts, New Hampshire, and Connecticut. I am well-versed in tax abatement processes and the intricacies of property tax forecasting.
To stay informed on the latest developments in property valuation, subscribe to our blog, where we regularly share insights on real estate taxes, commercial real estate, appraisals, capitalization rates, assessed values, and various approaches to value. Stay tuned for in-depth analyses and expert perspectives on topics such as fair market value, income properties, and the nuances of the cost, sales comparison, and income approaches to property valuation.
