What are the Types of Property Valuation

Correct valuation is one of the most important parts of buying or selling property. Sellers need to know they are getting fair value without overpricing. Buyers want to know they aren’t overpaying. However, there are different types of property valuation.

This post will cover some of the different methods for property valuation and what they mean.

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3 Types of Property Valuation

Sales Comparison Approach

Also known as the Market Data Approach, this is the common method for valuing single-family homes and vacant land. It compares the subject property with recently sold properties similar in size, features, and location.

Here’s how it works:

• Data Collection: Gather data on recently sold properties that closely resemble the subject property in size, location, and features.
• Adjustments: Compare the sales prices with the subject property and adjust for factors that may affect value. These adjustments account for differences in building condition, age, lot size, amenities, etc.
• Reconciliation: After adjusting the comparables, the appraiser reconciles the values obtained to determine a final estimated value for the subject property.

Cost Approach

This approach is employed when valuing properties with improvements, such as buildings. It estimates the value of the land and the buildings separately while considering depreciation. The cost approach is useful for unique properties or ones with few comparable transactions.

Here’s how it works:

• Land Valuation: Estimate the value of the land as if it were vacant and available for its highest and best use.
• Building Cost Estimation: Calculate the current cost of constructing the building(s) and site improvements.
• Depreciation Consideration: Account for depreciation to the buildings or improvements. Depreciation includes physical deterioration, functional obsolescence, age, and economic obsolescence.
• Final Valuation: Deduct the estimated depreciation from the building cost and add it to the land value. The result is the estimated value of the property.

Income Capitalization Approach

Investors use this method for income-producing properties like apartment complexes, office buildings, and retail centers. It estimates property value based on the relationship between the rate of return and the property’s net income.

Here’s how it works:

• Net Operating Income: Estimate the property’s annual potential gross income and deduct vacancy and operating expenses to calculate the net operating income.
• Capitalization Rate: Determine the appropriate capitalization rate. You can determine the capitalization rate by dividing the property’s net income by market value.
• Final Valuation: Divide the net operating income by the capitalization rate to estimate the property’s value as an investment.

Ready to make smart real estate decisions?

Understanding these three types of property valuation can empower you to make informed real estate decisions. However, you must know which methods to use for different properties.

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