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Frequently Asked Questions

What is property valuation?

Property valuation is the process of estimating the market value of a real estate property. It uses various methods including comparable sales (comps), cost approach, income approach, and price per square foot analysis to determine a property's fair market value.

What is the comparable sales (comps) method?

The comparable sales method values a property by comparing it to similar properties that have recently sold in the same area. Adjustments are made for differences in size, condition, location, and features. This is the most common method for residential properties.

How do you calculate price per square foot?

Price per sq ft = Sale Price / Total Square Footage. This metric allows comparison of properties of different sizes. Average home values range from $100-500+/sq ft depending on location. Luxury properties in prime areas can exceed $1,000/sq ft.

What is the adjusted value in property valuation?

Adjusted value is the comparable sale price modified for differences between the comp and the subject property. Adjustments are made for: square footage ($50-200/sq ft), bedrooms ($5,000-20,000 each), bathrooms ($5,000-15,000 each), lot size, condition, and location.

What is the income approach to valuation?

The income approach values a property based on its income-generating potential. Value = Net Operating Income / Cap Rate. This method is primarily used for rental and commercial properties. Cap rates typically range from 4-10% depending on property type and location.

What is the cost approach to valuation?

The cost approach estimates value as the cost to rebuild the property minus depreciation plus land value. It is calculated as: Land Value + (Replacement Cost - Depreciation). This method is useful for unique properties and insurance valuation.

How many comps do you need for accurate valuation?

Appraisers typically use 3-6 comparable sales. More comps provide better accuracy but finding truly comparable properties becomes difficult beyond 6. The best comps are within 0.5 miles, sold within 6 months, and have similar size, age, and features.

What adjustments are made to comparable sales?

Common adjustments: time (market appreciation/decline), square footage, bedrooms/bathrooms, lot size, age/condition, garage/parking, upgrades, location within neighborhood, and amenities. Adjustments are typically $1,000-20,000+ per difference depending on the market.

What is the difference between appraised value and market value?

Appraised value is an appraiser's opinion of value based on recent comps and property condition. Market value is what a willing buyer would pay a willing seller in the current market. Appraised value is used by lenders for mortgage approval.

How do you adjust for square footage differences?

Adjust at $50-200 per sq ft depending on market. For example, if the subject is 200 sq ft larger than the comp, add 200 x $100 = $20,000 to the comp's sale price. The adjustment amount varies by market and the type of space (above grade vs basement).

What is a CMA in real estate?

CMA (Comparative Market Analysis) is a real estate agent's estimate of a property's value using comparable sales, active listings, and expired listings. CMAs are less formal than appraisals but useful for pricing decisions. Most CMAs are free for clients.

How do you value a unique property?

Unique properties (historic, architectural, waterfront) are difficult to value using comps. Use the cost approach for the structure and market data for the land component. Consider hiring a specialist appraiser with experience in unique properties.

What is the 25% rule for property valuation?

The 25% rule suggests a property's value should not exceed 25% above the median of comparable properties without strong justification. Significant adjustments over 25% indicate the property may not be comparable and a different comp should be used.

How do local market conditions affect valuation?

In seller's markets (low inventory, high demand), values trend toward the upper end of the comp range. In buyer's markets, values are at the lower end. Seasonality also affects values: spring/summer typically have higher prices than fall/winter.

What is a broker price opinion (BPO)?

A BPO is a real estate broker's estimate of property value, less detailed than an appraisal but more detailed than a CMA. BPOs are often used by banks for foreclosure properties, short sales, and portfolio reviews. Cost is typically $50-150.

How do you determine land value?

Land value is determined by comparable land sales, the residual method (property value minus improvement value), or the allocation method (percentage of total value allocated to land). Land typically represents 15-30% of total property value in most markets.

What is the sales comparison approach?

The sales comparison approach values a property by comparing it to recently sold similar properties. This is the most reliable method when sufficient comps exist. The appraiser creates a grid of comps with adjustments for differences.

How do you adjust for property age?

Age adjustments account for depreciation and outdated features. Typical adjustment: $1,000-5,000 per year of age difference for homes under 30 years. Older homes may have larger adjustments for major system replacements needed (roof, HVAC, plumbing).

What is the gross rent multiplier (GRM) method?

GRM = Property Price / Gross Annual Rent. This quick valuation method is used for rental properties. Typical GRM ranges from 8-15 for residential rentals. A property with $24,000 annual rent and a GRM of 10 would be valued at $240,000.

How do you value a property for tax purposes?

Tax assessed value is calculated by the county assessor using mass appraisal techniques. It is typically a percentage (80-100%) of market value. Property taxes are based on the assessed value times the mill rate. Owners can appeal assessments if they exceed market value.

What is the FIFO method for comp selection?

FIFO (First In, First Out) for comp selection prioritizes the most recent sales first, then expands the search area or time frame. Best comps: sold within 3 months, within 0.25 miles. Expand to 6 months and 0.5 miles if needed.

How do you adjust for location differences?

Location adjustments are the most subjective. Corner lots, cul-de-sacs, water views, golf course frontage, and premium school districts can add 5-20%+ to value. Busy streets, power lines, and undesirable neighbors can reduce value by 5-15%.

What is a drive-by appraisal?

A drive-by appraisal (exterior-only inspection) evaluates the property from the street without entering. It is less accurate but faster and cheaper ($150-300 vs $400-600 for full appraisal). Used for refinancing or portfolio reviews.

How do renovations affect property value?

Kitchen remodels: 70-80% ROI. Bathroom remodels: 60-70% ROI. Deck/patio: 65-75% ROI. Roof replacement: 60-70% ROI. Window replacement: 65-75% ROI. Basement finish: 50-75% ROI. Over-improving for the neighborhood yields lower returns.

What is the difference between value and price?

Value is the estimated worth of a property based on analysis. Price is what a specific buyer agrees to pay. The sale price may differ from appraised value based on negotiation, timing, and market conditions. Ideally, price and value converge in efficient markets.

How do you value a distressed property?

Distressed properties (foreclosures, short sales, fixer-uppers) are valued at ARV (After Repair Value) minus repair costs minus a profit margin. The 70% rule is commonly used: Maximum Purchase Price = ARV x 0.70 - Repair Costs.

What is the band of investment method?

The band of investment (or weighted average cost of capital) calculates the overall cap rate by weighting the cost of debt and equity. Cap Rate = (Loan-to-Value x Mortgage Constant) + (Equity Percentage x Equity Dividend Rate). Used in income property valuation.

How do you calculate weighted average comp value?

Weighted average gives more importance to comps that are most similar to the subject. Weight based on: proximity (0.5x), recency (0.3x), and similarity (0.2x). Total the weighted values and divide by total weights for the estimated market value.

What is a desktop appraisal?

A desktop appraisal uses public records, MLS data, and online resources without a physical inspection. It is faster and cheaper ($100-200) but less accurate. Desktop appraisals are sometimes used for refinancing or in low-risk transactions.

How do you adjust for property condition?

Condition adjustments: Excellent (+5-10%), Good (no adjustment), Average (-5-10%), Fair (-10-20%), Poor (-20-40%). Condition is subjective and based on: roof, HVAC, plumbing, electrical, flooring, paint, windows, and overall maintenance.

What is the FHA loan appraisal threshold?

FHA requires that the appraised value equals or exceeds the sale price. If the appraisal comes in low, the buyer must make up the difference in cash or negotiate a lower price. FHA appraisals also require the property to meet minimum property standards.

How do you value mixed-use properties?

Mixed-use properties (residential + commercial) are valued by analyzing each component separately. Use the income approach for commercial units and the sales comparison approach for residential units. The combined value is the sum of the component values.