A real estate appraisal is necessary to gain financing for real estate related transactions or resolve tax and legal issues, including eminent domain. In addition, a real estate appraisal may be used to identify the value of a partnership interest, gift or inheritance, establish rent schedules, aid in corporate mergers, estimate liquidation value or identify other goals and alternatives with regard to real property.
There are many variable factors to consider when valuing real estate. They are typically dependent on elements such as location, age, condition, market rental rates, maintenance costs and other comparable properties. Therefore, an appraiser will typically use one or all of the following approaches to determine their opinion of value:
Cost Approach
Sales Comparison Approach
Income Approach
An appraisal requires the study of all value influences. Anticipation and change are fundamental in the study of value. Anticipation represents value created by the expectation of benefits derived in the future. Change is the law of cause and effect at work. Social, economic, governmental and environmental forces which affect real estate are in a constant state of inevitable transition. Since these forces undergo continual change, so do individual property values. As a result, value estimates are only valid as of the date of an appraisal.
Generally, this valuation method considers the cost to rebuild the structure from scratch, the current costs associated with the land, construction materials and other replacement costs. The cost approach is typically applied when appropriate comparables are difficult to locate. This might occur when the subject property consists of unique or specialized improvements or when upgraded structures have added substantial value to the land.
