Evaluating the value of a piece of property is necessary for several reasons. It s always nice to know where you stand with a piece of property. If you are considering purchasing a piece of property, you want to know that it is worth what you re paying for it. If you own a piece of property, you might want to know how much you should sell it for. There are many reasons that could warrant you evaluating the value of a piece of property. When you need to value a property, there are three main methods for doing so: the cost approach, comparable approach, and income approach. All three methods can get you to the same value in some cases. Some properties are evaluated better with one method over the other. Here is a look at the three different methods and how they work.
The cost approach is the most detailed of the three. With this method, you actually start from scratch and figure out how much it would cost to build the property again. You will go through the property and come up with a comprehensive list of every feature in the property. You will then do research and figure out how much each of those pieces is worth. You will get estimates for labor and everything that goes into the construction of a piece of property. Then you will use depreciation or in some cases, appreciation to account for the age of the building and the market as a whole. Combining all of this information will give you a value to use for the property.
The comparative approach is when you compare your property to several other similar properties. This method works best when there are several pieces of comparable property that have recently sold in your neighborhood. With this method, you will get information on three to six properties, depending on how many are available. This is best done if you have access to the recent home sales information in your city. Once you have the information, compare each home individually to your home. Add for features that your home has that others do not. Subtract for features that your house does not have that the other houses do. With this method, you should be able to come up with a value based on what the recent market for similar houses are.
The income approach is very common in commercial real estate. Since the value of these properties is associated with how much money they can bring in, they have more value than just the physical structure itself. In order to use the income approach, real estate investors use what is called a capitalization rate. This capitalization rate gives the investor a ratio to use when evaluating the income that the property brings in. With these figures, they can properly place a value on the property.
Regardless of which method you use, they can all help you arrive at the value of a particular piece of property. Just make sure and do your research on each method so that you can come up with the most accurate value possible.
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