Article Surfing Archive

There are numerous methods to determine the market value of a property, including income valuation, replacement value and comparables sales.

Comparable Sales Method (Comps)

This is the most common, quickest, and usually most accurate method. It takes into account supply and demand in the real estate in your specific location, which are the best indicators of market price. You will hear about this method from Realtors, investors and appraisers since it is a fairly accurate way to assess value at a glance.

Appraisers use this method by finding recent sales of similar properties in the area and then determining the value different features contribute to the home's value. For instance, a bedroom might add $20,000 to the price of a house, so a 3 bedroom would be worth $60,000 based on bedrooms alone. They add up all the features in the subject house to find a comparable value.

In order to simplify this method, Realtors and many investors use the assumption that a home's price can be based on the square footage. This is usually a safe assumption, especially when you are only trying to get a rough idea of a house's value. In this case, you take your comparable homes and divide their selling price by their square footage and multiply the result by your subject property's square footage.

Comparable sales information can be obtained from Realtors or appraisers with access to local multiple-listing systems, or from title companies. There are also valuation websites that can give you an idea of your home's value, but they usually require handing over personal information in order to get access. They also keep their methods and databases secret so who knows what criteria they use to determine comparables.

Replacement Value

This method is not widely used in the real estate industry any more, but previously had its place among insurers and investors. The idea is similar to an appraiser's comparable methods, except that for this method you determine how much it would cost to build each piece new today. For example, maybe it costs $20,000 to build a 2-car garage. So you again add the values up to find the market value of your home.

The downside to this method is that it assumes that the construction market and the home-sales market follow the same trends. If new homes in the area are in demand, then construction companies will be too and will raise prices accordingly. In the same area, older homes will not have the same value as new homes, so their real market value will be different than the implied value of this method.

Income Valuation

Income valuation is most commonly used by investors, and more specifically in the office-rental sector. Office buildings are monstrously expensive to build and maintain, but because they have a very clear division of revenue and cost, it can be beneficial to determine the building's value based on income.

This method makes use of Net Present Value and is therefore a sound estimation for businesses to use.

An example of this usefulness is if office buildings are not in demand, but a particular office building is leased for 10 years by a company. Selling prices of offices in the area will be depressed, but the value of the lease-income on this building will not be considered in the comparable-sales method, so and income valuation will provide a more accurate value.

It is uncommon to use this method to value residential property except in the situation that it is a rental property with relatively stable rental history (such as a student-home in the area of an established university).