What is a Property Worth?

Posted on December 29, 2011. Filed under: Toby Olsen NMLS #501067 |

It sounds like a simple question.  For those who have refinanced, or bought or sold a property recently, the answer is more art than science.  It is a difficult question to answer whether we are filling out a personal financial statement, listing a property for sale or making an offer to purchase real estate. 

There are three basic components to arriving at a value:

  • Cost approach:   How much would it cost to purchase a lot and construct similar improvements?
  • Income approach:  This is used for income-producing properties, such as a residential rental.  The income received determines a market value.
  • Comparable Sales approach:  The most common of the three.  Documented sales of similar properties are used to determine the value of the subject property.  These sales are adjusted to fit the size and location of the property.

Some combination of these approaches is typically used by appraisers when a value is put on a property.  The fluctuations in real estate prices are what make this process an art.  When property values decline, many properties are sold far below what it would cost to build.  The income generated from properties also may be very inconsistent.  And it may be difficult to find similar properties sold recently.

A better understanding of the process lets you ask the right questions.  It comes down to what your grandfather may have told you: “Something is worth what someone else is willing to pay for it.”  Proper research of the three approaches will help you make an informed estimation of what your property is worth.

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