Real Estate Investing Facts

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Prior to investing in real estate, I interned for a real estate appraiser. Everyday we would receive phone calls from angry homeowners who were unhappy with the amount that their property had appraised for. It didn’t take me very long to realize that most of these people, besides having an overstated value for their home, also had no concept of how a real estate appraisal works. In many cases, they were expecting the value to match their dollar to dollar upgrades or improvements to the home, not realizing that the neighborhood market value dictated most of the value.

I don’t want you to be one of those people! Now, I’m not saying that you will never encounter an appraiser totally undercutting the value of your home, but, if you call this appraiser’s office to dispute their value, I want you to come across as if you know what you’re talking about!

And this is why I’m writing today. To educate you a little on the process of a real estate appraisal. With single family homes, there are two methods used in a real estate appraisal. These are the replacement cost analysis and the market analysis that uses comparable sales. There is a third appraisal method, based on capitalization, but this is used for income properties, and I’m not going to get into that much today.

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When figuring value based on replacement cost the question is: What would it cost to buy this land and put this house on it? If the improved land would cost $40,000, and the house can be built for $150,000, the value indicated would be around $190,000 – if the house is almost new. If it has used up 10% of its useful life, you can deduct $15,000 for depreciation.

Figuring value based on replacement cost isn’t a very useful method. It’s difficult to say what land is worth in a city center where none is left for sale, for example. It’s often used as a secondary method, or for unique homes that can’t be compared easily with others. The best method of real estate appraisal for single family homes is a market analysis using comparable sales.

Basics Of Real Estate Appraisal

For an idea of what a home should sell for, you need to compare it to homes that have sold. Use the sales information for at least three similar homes in the same area that have sold within the last year, preferably within the last six months. This is available in the county records, or from a real estate agent with access to the MLS (multiple listing service).

Now, for the confusing part. Start with the selling price of each comparable. Adjust for differences from your subject home. If your house has a second bathroom, and the a comparable doesn’t, you ADD the value of the bathroom to the sales price of the comparable. If a comparable has a blacktop driveway, and the your home doesn’t, you SUBTRACT the value.

What you are doing is rectifying differences, to see what comparable homes would have sold for if they were like yours. If a comparable sold for $140,000, and a bathroom is worth $15,000 in your area (ask a real estate agent for help with these figures), add $15,000 for the bathroom it doesn’t have. Subtract $4,000 (or whatever it is worth) for the paved driveway it does have. You then have a comparable sales price of $151,000.

Do this with all differences between the subject home and each comparable. Once done, you average the comparable prices. For example, if the three comparables have adjusted sales prices of $151,000, 162,000, and 149,000, you add the three figures and divide by three. This indicates a value of $154,000.

All appraisal is an inexact science. If you find only comparables sold over a year ago, you have to estimate appreciation in the area. If one comparable sold with seller financing, you have to decide how this affected the price. For all of the flaws, however, this is the most accurate method of real estate appraisal for single family homes.

I hope that you’ve enjoyed learning more about how value is determined in a real estate appraisal. Just remember that market conditions play the principal role in your value. Not your marble or granite kitchen counter tops! Hopefully, if you’re ever in a position where you must dispute your value with an appraiser, what I’ve written today can serve as your guide to justify your argument.

To Your Success!

Aiden Win

Mr. Foreclosure

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