Property Valuation: What are the Various Approaches Used

House model with property documentsAn essential feature of property ownership is its value. Property valuation enables you to know how much you should pay in property taxes and the rent you should charge if you are renting it. It is also necessary for financing, property insurance, and investment analysis.

There are different approaches to property valuation your realtor in Vail, CO might recommend. The ideal method depends on the type of property. Here are the three strategies used in property valuation.

Cost approach

This approach is based on the theory that the party interested in the property should not cough out more money for a property than it would cost to build a similar one. Your property is valued using a sales comparison approach then deductions for depreciation are made. The cost approach is typically used for valuing special-use property including hospitals, religious institutions, schools and religious institutions and for newly built properties.

Sales comparison approach

This is the most commonly used valuation method, which involves comparing one property with similar ones referred to as comparables. Properties are only considered comparables if they have been sold in less than a year under normal market conditions. To account for minor differences in comparables and get an accurate valuation, a sales comparison approach also considers the location, physical aspects, and age of the comparable.

Income capitalization approach

This valuation method is used for income-generating properties. There are two approaches used in income capitalization. Direct capitalization centers on a property’s gross annual income while considering its net operating income, expenses and vacancies. Gross income multiplier focuses on the property’s gross yearly income and divides it by its sales price to get its property market value. The latter is used for properties like family homes, which are not initially intended for income.

The prevailing real estate market conditions will also influence your property’s value. An accurate valuation depends on the systematic collection of data. It is hence essential to work with a competent and well-equipped valuation firm.