One of the key things that you need to know in property marketing and education is the different approaches that are used in understanding comparables. Comparables are used like the data in statistical sampling processes. From whatever it is that are drawn and measured from the comparables, it is used to estimate the opinion value. The downside about using this kind of approach in determining the opinion value is the nature of the real estate market itself being very inefficient and the significant error of data in market transactions. It is because of this that appraiser make use of many approaches to reconcile the varying opinion value in order to arrive with an appraiser’s opinion.
Comps are Market Comparable Analysis. And in order for these comps to be used, certain approaches can be utilized. Here are the approaches that are used in using comparables:
First is the sales comparison approach. This is the approach considered to be the mostly used among the three approaches in using comparables. What happens in this approach is that the appraiser looks for comparables, around three or more for residential analysis and a lot for non-residential analysis. With these comparables, the appraiser adjusts the selling prices using the different values that are being compared. Let us say, two properties are for sale. One is 2,000 square feet big and the comparable is around 2, 100. The comparable’s price would then be adjusted to a much cheaper price because of the difference in value. The adjustment would not be that much.
Second is the income approach. It is based on the estimated cash flow in the future, whether it is discounted or capitalized. The cash flow is then estimated in comparison with the comparable income generating properties. As for the rates of the discount and capitalization, they are often estimated by way of utilizing the recently made sales of properties that are being used as comparables. Because of the differential risk between the subject property and the comparables, appropriate adjustments are made.
The third approach is the cost. This calculates the cost of the improvements made and subtracts external obsolescence, depreciation, disutility factors. After, the subject improvement and any value added to the subject are then added. This is how you get the value through cost approach. This approach is very good in determining the value of the subject and is also very helpful in the calculation of costs of construction and other factors related. Yet, in actuality, for estimating the costs, the standard costing services is used and also the method of depreciation.
This is how the equation of cost approach looks like.
Land Market Value + Replacement cost new of improvements - All forms of depreciation + Entrepreneurial Profit = Market Value via the Cost Approach
This knowledge is very important for any real estate agent, appraiser and surveyor to know. It can even become as a sort of real estate investing lead generation tool that they can use to scout for prospects to invest on.
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