For single family homes, there are 2 fundamental methods used in real estate appraisal. They are replacement cost analysis, and using comparable sales. A third appraisal technique, based on capitalization, is used for income properties, and is covered in another article. In figuring replacement cost the question is: What would it cost to purchase this land and put this house on it? If the land (improved) would cost $40,000, and the house could be built for $150,000, the value indicated could be around $190,000 - if the house is rather new. If it has used up 10% of its useful life, you can deduct $15,000 for depreciation.
Replacement cost isn't really a very useful measurement. It's difficult to say what the land is worth in a city center where none is left available for sale, for example, and hard to gauge depreciation. It is used as a secondary technique, and for unique houses that can't be compared very easily with others. The primary method of real estate appraisal used for homes is a market analysis using comparable sales.
Real Estate Appraisal 101
To get a good idea of what a home should sell for, you should compare it to homes that have sold. Find at least 3 similar homes in the very same area that have sold within the last year, preferably within the last 6 months. This info is available in the county records, or from a real estate agent with access to the MLS (multiple listing service).
Now the complicated component. You begin with the selling price of each of your comparables. If your subject home has a second bathroom, and the a comparable does not, you add the value of the bathroom to the sales price of the similar. If a similar home has a blacktop driveway, and also the subject home doesn't, you take the value away.
You're rectifying differences, to see what comparable homes might have sold for if they had been like yours. Therefore if a comparable sold for $140,000, and a bathroom is worth $15,000 in your area (ask a real estate agent for help with these figures), you ADD $15,000 for the bathroom it does not have. Then you subtract, say $4,000, for the paved driveway it does have. This provides you a comparable sales price of $151,000.
You do this with all differences between the subject home and each comparable. When done, you average the three comparable prices. So if the 3 comparables have adjusted sales prices of $151,000, 162,000, and 149,000, you add the three figures and divide by 3. The indicated value of the home is $154,000.
Obviously all appraisal is an inexact science. If you can only find comparables sold more than a year ago, you have to estimate appreciation in the area. If one sold with seller financing, you have to decide how this affected the price. For all of it is defects, however, for single family homes, this is the most precise technique of real estate appraisal.
Replacement cost isn't really a very useful measurement. It's difficult to say what the land is worth in a city center where none is left available for sale, for example, and hard to gauge depreciation. It is used as a secondary technique, and for unique houses that can't be compared very easily with others. The primary method of real estate appraisal used for homes is a market analysis using comparable sales.
Real Estate Appraisal 101
To get a good idea of what a home should sell for, you should compare it to homes that have sold. Find at least 3 similar homes in the very same area that have sold within the last year, preferably within the last 6 months. This info is available in the county records, or from a real estate agent with access to the MLS (multiple listing service).
Now the complicated component. You begin with the selling price of each of your comparables. If your subject home has a second bathroom, and the a comparable does not, you add the value of the bathroom to the sales price of the similar. If a similar home has a blacktop driveway, and also the subject home doesn't, you take the value away.
You're rectifying differences, to see what comparable homes might have sold for if they had been like yours. Therefore if a comparable sold for $140,000, and a bathroom is worth $15,000 in your area (ask a real estate agent for help with these figures), you ADD $15,000 for the bathroom it does not have. Then you subtract, say $4,000, for the paved driveway it does have. This provides you a comparable sales price of $151,000.
You do this with all differences between the subject home and each comparable. When done, you average the three comparable prices. So if the 3 comparables have adjusted sales prices of $151,000, 162,000, and 149,000, you add the three figures and divide by 3. The indicated value of the home is $154,000.
Obviously all appraisal is an inexact science. If you can only find comparables sold more than a year ago, you have to estimate appreciation in the area. If one sold with seller financing, you have to decide how this affected the price. For all of it is defects, however, for single family homes, this is the most precise technique of real estate appraisal.
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