Valuing property at a fair market value is important to investors and homebuyers. While the actual valuing of property can be free for any number of methods, there are three well-known methods used today. These include; real estate appraisal (REO), estate appraisal (EA) and property appraisal by a certified appraiser. Each method has its own advantages and disadvantages.
Real estate valuation, property valuation or property appraisal is the procedure of determining an accurate value for the property in hand. Real estate transactions most often involve appraisals as they happen infrequently, usually once or twice a year, and each property is unique, unlike corporation stocks, which are almost identical and usually trade on a daily basis. An appraisal determines the fair market value of a property by applying specific standards and criteria that are established by an independent third party. These appraisers will be chosen based on their experience and qualification and will most likely be selected from a pool of real estate investors, either by recommendation or through a professional association.
While the use of real estate appraisals has been widespread throughout history, they have been especially useful in determining fair market value. Historically, real estate valuation has been a subjective process. In the past, homebuyers and sellers commonly relied on their personal knowledge and judgment when determining the fair market value of a property. While this still occurs, many experts believe that this method no longer accurately reflects current market conditions. For this reason, the use of an appraiser is advised, especially when it comes to real estate property, to provide an objective and unbiased approach to assessing value.
While it is true that most valuations take place in a somewhat subjective manner, this is not always the case. When using a real estate valuation to make an investment decision, it is important to choose a certified appraiser who is a member of a professional organization. This way, you can be confident that the certified appraiser you are using is an expert in his or her field. By joining a professional organization, you can also be assured that the appraiser you choose is licensed and is bound by a code of ethics that meets or exceeds state and local laws.
There are two types of property valuation that you should familiarize yourself with: the geographic-appraisal and the typically recognized market-price type. The geographic-appraisal deals with the location and general condition of the property, as well as its relation to surrounding properties in the same area. Typically, the greater the number of nearby comparable sales, the more accurate your property valuation will be.
Another commonly used property valuation technique is the typically recognized market-price type, which is used to determine the value of a real estate property without taking into consideration any comparable sales that may have occurred in the past. Generally, this type of valuation uses net operating income (NOI) to estimate the value of a property. The net operating income (NOI) indicates the property’s current market value minus depreciation over the previous five years. Net operating income is an important part of a property’s true value because it takes into account the property’s depreciated monetary value and the current monetary value of the property as reflected in current tax rates.
Historically, the two most widely used property valuation methods are the application of the replacement cost method and the income capitalization rate. The replacement cost method considers the replacement cost of a property, which is the market price less depreciation for one year. This method is particularly useful for real estate investments that are geographically isolated, since it is usually much easier to sell properties at a higher price than it would be to sell them at a lower price. For properties that are located within a relatively short distance from their neighbors, however, the replacement capitalization rate can provide a more accurate picture of the property’s current value. This valuation method is also used in commercial real estate investment property valuation.
Real estate appraisals can also be performed using methods that evaluate market trends. These valuations are most commonly used by bankers and financial lenders to determine the worth of certain types of commercial real estate loans. Generally, these valuations are used to help banks determine the loan’s interest rate. In addition, borrowers usually use future home prices to help determine the loan’s terms and interest rate. Some of the other common uses of real estate appraisals include determining the property’s fair market value, determining the insurance rate on a mortgage loan, determining the value of certain types of owned businesses such as franchises, determining the value of residential rental property, and determining the fair value of a transferable trade credit. While these valuations can be used for a variety of property purposes, they are not as widely utilized as they should be, due to the limited number of qualified buyers and sellers who regularly utilize them.