Appraisal of a Real Estate Investment

Appraisal of a Real Estate

An appraisal is an estimate of the market value of a property by an appraiser. All north dallas apartments for rent go through the assessment process to assess its current market value. The evaluation report evaluates the property and its attributes, the neighborhood, the region, the city and the nation where the property is located. A property is appraised by using any of the following three standardized methods, and no one method can be used to evaluate different properties.

  1. The income capitalization approach

The income appraisal method is widely used to estimate the value of income-producing investments. Examples include commercial real estates like office buildings and shopping malls. The value of a property calculated in the order of:

  • Determining the net operating income
  • Determining the capitalization rate
  • Estimating the property value by the net operating income by the capitalization rate

The downside to this approach is that it determines the current property value by assuming future benefits that are uncertain.

  1. The sales comparison approach

This method is extensively used to determine the value of single-family homes by comparing the property with recently sold properties using similar features such as location of the property and its size. Adjustments in price are made for the differences between the property that is appraised and the comparable property. A major limitation of this approach is that it cannot give accurate results when the market is significantly weak, and there are fewer properties for comparison.

  1. The cost approach

This form of appraisal conducted in public buildings such as hospitals and schools that do not produce income and are not often sold. The sequential steps to arrive at the appraisal are:

  • Estimating the value of the site
  • Determining the replacement cost of the building
  • Calculating the depreciation
  • Deducting the depreciation from the replacement cost
  • Evaluating the value of the property by adding the estimated site value to the above result

Where the sales comparison approach fails due to a weak market, the cost approach is best applied.

  1. The Gross Rent and Gross Income Multipliers approach

The gross rent multipliers (GRM) method used for appraising residential properties. The approach involves:

  • Estimating the GRM value as a ratio of sales price to the monthly rent; at least three to four GRMs of similar properties are used to determine the most accurate GRM.
  • Determining the property value by multiplying the GRM with the rental income.

The gross income multipliers (GIM) approach is used for appraising industrial properties and is similar to GRM except that all revenue values are added to the rent, and the rest of the calculations are similar. The multiplier method is best used to compare peer properties in residential or trade areas.

The first three methods are related to that the values used in one method are employed in either of the other two methods to determine the property value. Hence, it is effective if a property is appraised and analyzed using all the three approaches for accuracy.