Property Appraisals: Know the Value of Your Investment
An appraisal is the process of determining the market value of a property. The market value is a measure of the property’s worth. An appraiser may use a combination of three basic valuation methods, also known as the “Three Approaches to Value,” to determine the market value of an investment property. As a Tampa property management company, we understand the importance of knowing the market value of a property to ensure that you are making a sound investment.
A property appraisal is not just necessary for buying or selling a property. In fact, there are several possible reasons for needing an appraisal of an investment property. Though it is true that the most common reason is for sale of a property, among other things, an appraisal can be needed for refinancing, applying for cash or business loans when the property is used as collateral, and also for tax reassessments.
THE THREE APPROACHES TO VALUE
1. Sales Comparison Approach to Value
The sales comparison approach to value is a commonly used approach for estimating the value of a property. Sometimes referred to as the market data approach, this method assesses the value of a property based on selling data of similar properties in the area, usually three or four. These are known as comparables. The comparables must be very similar to the subject property and must have been sold within a year in a competitive and normal market in order to provide an accurate estimate of the value of a property.
2. Cost Approach to Value
The cost approach to value, which is sometimes referred to as the summation approach, bases the value of a property on the current estimated cost of replacing or replicating a property of comparable use and marketability. This method combines the value of any existing structures on the property minus depreciation and the value of the lot separately to calculate the value of the improved property. It is assumed that a reasonable buyer will not pay more for a property than it would cost to replace it with a similar lot and comparable structures.
3. Income Approach to Value
The income approach to value is typically used in combination with the sales comparison and cost approaches to assess the value of an income-producing investment property. The income approach is frequently used for valuing commercial and residential real estate investment properties. As an investment property owner, this approach is the more important of the three. This approach bases the value of the investment property on the value of two factors: the “market rent” that a property can be expected to earn and the “reversion” (resale) when the property is sold.
OTHER FACTORS THAT AFFECT THE VALUE OF YOUR PROPERTY
An appraiser may take into consideration other factors that fall outside of the “Three Approaches to Value.” Some of these factors include the size and shape of the property, the condition of the exterior and interior of the property, extra features, and additional improvements.
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If you are looking to buy an investment property, or already own investment properties, please all us at (813)968-5665 to learn more about our property management services, or submit our proposal request form.