Residential Appraisals - Valuation Approaches
The approaches used to establish value for Utah residential appraisals vary by suitability.
Types of Residential Valuation Approaches:
There are three major groupings of valuation methods in appraising real estate:
Sales Comparison Approach
The sales comparison approach is generally used in residential appraisals. Properties that have been recently sold and are similar to the subject property are generally used.
The sales comparison approach compares the subject property’s characteristics with those comparable properties which have recently been sold in similar transactions. Price adjustments are made for differences between the comparables and subject property.
The sales comparison approach is based upon the principle of supply and demand, as well as upon the principle of substitution. Supply and demand indicates value through typical market behavior of both buyer and seller. Substitution indicates that a purchaser would not purchase an improved property for any value higher than it could be replaced for on a site with equivalent utility, assuming no undue delays in construction.
The fundamental premise of the cost approach is that a potential user of real estate would not or should not pay more than it would cost build an equivalent property. The cost of construction minus depreciation plus land, therefore, is a limit or at least a metric of market value.
It is generally considered that the cost approach gives the best indication of market value when the property in question is new and exhibits the appropriate highest and best use.
The income approach is a valuation method appraisers and real estate investors use to estimate the value of income-producing real estate. This is generally limited to income-producing properties of two- to four-unit housing, or more, such as apartment complexes. This method of valuation relates value to two things:
- The market rent that a property can be expected to earn; and
- Reversion or resale when a property is sold.
Kranstover Appraisal Services is well versed in residential valuation approaches.
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