_ PART 2 _ Did your neighborhood pass your Assessment?

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Once you get your research done, Once you have a good idea of how the market looks, you can do an evaluation of the actual property you’re looking at. There are a few appraisal methods you can go through, but in every case, you’ll be determining the value of the property versus its cost and market value.

Sales Comparison Approach

With this method, you estimate a house’s value by measuring it against recently-sold properties with similar traits. Commonly used when valuing single-family homes and land, this is the one you’ll most likely want to work with unless you’re flipping the property.

Note that to be comparable to your property, the ones you evaluate must…

• Be as similar to your property as possible

• Have been sold within the last year

• Have been sold under conditions that are typical of your market.

Also note that adjustments may be made for factors such as the age and condition of buildings, the date of sale, the location, certain physical features, and the terms & conditions of the sale (for example, if a property is sold to a relative at a discount).

Cost Approach

A cost approach compares the value of the buildings against the value of the property they’re constructed on. It most often comes into play when assessing a property that’s been improved in some way through the construction of additional buildings. For example, if you’re selling land on which you’ve constructed a guest house during your ownership, this is the method you’d use.

In a Cost approach, building costs are calculated by square footage and construction cost based on both labor and materials. It also accounts for deprecation such as through physical deterioration, obsolescence of design features, and external factors that might lower the property value (being close to a loud highway).

Income Capitalization Approach

The last of the three approaches is based on the net income of a property versus the rate of return required by an investor. In plain English, this means that it’s used to evaluate the worth of properties like apartments, office buildings, and shopping centers. Unless you’re getting into the rental business, you’re probably not going to deal much with this one – though it can be pretty straightforward if you do.

How it’s calculated is pretty simple, per Investopedia:

1. Estimate the annual potential gross income

2. Take into consideration vacancy and rent collection losses to determine the effective gross income

3. Deduct annual operating expenses to calculate the annual net operating income;

4. Estimate the price that a typical investor would pay for the income produced by the particular type and class of property. This is accomplished by estimating the rate of return, or capitalization rate

5. Apply the capitalization rate to the property's annual net operating income to form an estimate of the property's value.

And there you have it. An overview of everything that’s involved in a real estate market evaluation. Assuming you don’t want to deal with the specifics of the above on your own (not everyone is great with numbers), you can always hire someone to help you along. In the meantime, get out there and start buying.

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