Wilmington and Burgaw Area Real Estate News

There are three ways that an appraiser analyzes the data he or she collects for a property. These approaches produce different end values, so an appraiser will use more than one approach to determine the best fitting value. Here is a short description of these approaches:

1.       The Sales Comparison Approach

In this approach, the appraiser matches up the property with recently sold homes. These are called comparables or comps and the best fitting ones are chosen according to style, square footage, lot size, age of home, number of bedrooms, number of bathrooms, heated space, unheated space, garages, and additional features like fireplaces, decks, patios, and swimming pools. The overall condition and quality of materials are considered. Each comparable is assigned a price, which is determined by the features that are inferior or superior to the primary property and the home with the most similar features is given the most weight. This approach is considered the most reliable of the three approaches.

2.       The Cost Approach

This approach beaks down the property into three parts. First, the appraiser determines the value of the land as if it were vacant. Then, that is added to what the appraiser determines it would cost to completely replace the current home. Finally, he or she factors in depreciation (physical deterioration, undesirable design features, and location near unchangeable, undesirable features like industrial zones). Because The Cost Approach takes into account the current cost of materials and current techniques, this approach is most used with new construction or special purpose properties.

3.       The Income Capitalization Approach

As the name implies, this approach is used for properties that will be producing some sort of income, like rentals, apartment buildings, etc. The appraiser looks at other income creating properties and factors in the rate of return, a vacancy allowance, lost rent, and net operating expenses (taxes, insurance, maintenance, repairs, appliance replacement, etc.). The income produced divided by the rate of return (or capitalization rate) equals the value of the home.

The appraiser will use more than one approach to come up with the value of the home. He or she will reconcile those numbers – determine what factors are not as important as the rest. An average is not used, because doing so would be saying that each approach has equal weight when, in fact, one approach is more suitable than the others depending on the type of property. So, the appraiser must give the most fitting approach more weight.