How Do Real Estate Appraisers Determine a Property’s Value?

Get an explanation on how real estate appraisers determine your real estate’s value.

A real estate appraisal is the process of developing an opinion about a real estate property to determine its price and market value. When it comes to selling a property, estimating a property’s value holds the same weight as marketing. Homeowners can sell their property for whatever price they want. However, they should base the price on the property’s market value if they want it to be sold. 

There are ways home appraisers determine the market value of a property. If you are a homeowner who is trying to sell a real estate property, it is important to have first-hand knowledge of how real estate appraisers appraise a property. This way, you can assess if the property is worth its price. There are several methods on how property appraisers determine property price. 

Types of Appraisal Methods 

The Walk Through 

One of the easiest methods done by licensed home appraisers is walking through the property. They consider the property’s size, layout, maintenance, and other factors in determining a property’s estimated price. During this process, the appraiser visits the property and takes notes. Amenities, upgrades, interior, and exterior are all included in the property’s criteria. 

When it comes to the exterior, the appraiser checks the foundation for cracks and signs of water damage. In terms of interior, the appraiser won’t necessarily determine property value solely because of its décor, but it helps. Appraisers mostly inspect a property’s flooring, light fixtures, windows, and doors. The number of bedrooms also determines property value. 

Sales Comparison Approach 

This method is when appraisers determine property value by comparing it to nearby properties in the area. They do this by searching for recently sold residential lots and comparing them. By far, this method is the most popular property appraisal method. 

To have an estimate, you can add three sales prices of properties within the area and divide them by the number of comparable properties. For example, if you compare three properties with the price of two million pesos each, your formula should be six million divided by three. This gives you a fair market value of two million pesos for your property. 

Cost Summation Approach 

On the other hand, this method considers calculating the entire cost if a home is entirely replaced using local construction materials and labor. Cost summation is done for the land and building improvement before the values are combined. This method helps to know the cost of buying land and building the property minus the rate and cost of repairs. 

For example, if a house and lot that is 200 square meters are valued as PHP 10,000/square meter, the price of the property is 2,000,000. Let’s say that the building is 10 years old, divided by 40 years is equals 0.25. Php 2,000,000 x 0.25 puts the property’s depreciation value to Php 500,000. 

What you should do next is subtract its depreciation value from the total cost of the property. In this case, Php 2,000,000 – Php 500,000. The present value of the building now is 1.5 million pesos. 

Income Capitalization Approach 

This approach is also called the income approach where real estate investors determine the fair market value of a real estate property by the amount of income the property generates. There are two variables in this approach, the property’s net operating value (NOI) and the property’s cap rate. 

A property’s net operating income refers to a property’s income after paying all operating expenses. On the other hand, the capitalization rate, also known as cap rate, is the property’s estimated NOI as a percentage of its market value. The income approach is mostly done on commercial properties but can also be done on residential ones. 

The NOI is computed by subtracting a property’s gross income from its operating expenses. For example, if a condo unit in Lipa generates Php 240,000 annual income and has an annual expenditure of PHP 50,000 in operating expenses, the NOI would be PHP 190,000. 

To compute the cap rate, you need to divide the property’s net income by its current market value. Let’s say that the same apartment has a market value of Php 10,000,000. Php 240,000 / Php 10,000,000 gives you a cap rate of 0.024.

If you don’t know the current value of the property, you can determine its cap rate by dividing its annual income by its purchase price. 

Difference Between Market Value and Appraised Value 

The difference between market value and the appraised value is that market value is based on a general assessment of the property, but appraised value is the overall value of the property after a licensed property inspector determined the value of a property. 

What Happens After Property Appraisal?

Property appraisal can take anywhere from 15 minutes to a few hours, depending on the size of the real estate property. When the property appraisal is finished, the licensed property appraiser finishes a detailed analysis of the property. 

The home appraisal report will have a description of the interior and exterior, the location, amenities, and the appraiser’s opinion on the property. The list also includes three comparable homes sold in the area, identification of problem areas in the property, and the appraised value. 

How to Increase Appraised Property Value?

You can increase the appraised value of a property by decluttering it. Real estate appraisers will think that the property is well-maintained if the property is orderly. As much as possible, you should make the property presentable as if you’re selling it to an actual homebuyer. 

And before the appraisal, you should make sure that there are no repairs and renovations underway on the day of the appraisal. It is better if the appraiser would see improvements on the property when they’re already finished. You should also tell the appraiser the kind of neighborhood that the property has. The location is an excellent factor in a property’s value so this should not be overlooked. 

And if ever the appraisal is lower than you expect, you should not be discouraged. Instead, you should focus on fixing the areas where you need home improvements. Sometimes, these areas only need home improvements for a better appraisal.