An appraised value is simply an opinion of a property's value based on specific methods and criteria. Estimating the appraised value of a piece of property can be a tricky situation if you are not familiar with three key appraisal approaches. According to The Appraisal Foundation, these three approaches to appraising properties are the sales comparison, cost and income approaches. For detail explanations and rules for appraisers, please refer to The Appraisal Foundation's annual publication, Uniform Standards of Professional Appraisal Practice, or USPAP.
How to Estimate Appraised Value
Find comparable properties for the sales comparison approach. Look in your area for comparable properties that have sold within a year of the appraisal date. Comparables need to be close in size, class of construction and condition. Obtaining the sales price of homes can be done by accessing various real estate web-sites or by contacting a Realtor in your area. Compare the homes and determine what, if any, features of a sold house contributed to the sales price. For example, if there are two similar homes and one sold for $20,000 more because it had a pool, adjust that sales price down $20,000 if the subject property does not have a pool. Once appropriate adjustments are made to the sold homes, determine the median value of those properties to find the value of the subject property. The key is to obtain comparables that require few adjustments. The sales comparison approach is the most used approach.
Use the cost approach to estimate what it would cost to build an equivalent property. The construction costs for a new home will help determine the value of your already-constructed home, but you will have to make adjustments for the land and depreciation. Estimating the cost to build a home by conculting guides like the Marshall & Swift Residential Cost Handbook, which professionals use to estimate the cost of every board, nail and shingle required to build a new house. Partnering with builders is another great way to obtain this information.
Use the income approach if your property produces income. This would typically be for appraising a commercial property. You would determine the property's value based on the income it produced. An example would be an apartment complex with a net income (after expenses) of $80,000. If you are looking for a capitalization rate (rate of return) of 8 percent, simply divide $80,000 by 8 percent to get a property value of $1,000,000.
Compare the three approaches. After you have considered all three approaches, you should choose the value that makes the most sense. In the case of a residential home, using the sales approach would be appropriate. If the home is under construction, the cost approach may hold more weight. If the property is commercial, the income approach would be more accurate.
After receiving a Bachelor of Business Administration from Baylor University, Matthew Felter spent nine years managing several large big box retail locations. He is an appraiser in Texas with knowledge in residential, land, apartment and agricultural valuations.