If you are a real estate investor, or even if you are just considering buying or selling a home, then it is important to be able to estimate the value of the property. Professional appraisers use several techniques to arrive at a fair estimate. Remember that the tax assessment is usually about 70 percent of the true value of your property. So appraisers will usually employ one of three techniques to get a true valuation.
The first and simplest to use is the to look at comparables. Recent property sales and, of course, current listings are a matter of public record. You can find properties that are similar to yours in size and location and look at what they sold for or at what price they are currently listed to get an approximate value of your own property. Remember to take into consideration any advantages or disadvantages of your property when adjusting the estimate. If, for example, you can get a zoning variance that will allow for greater freedom in improving the property, that alone can be worth quite a bit of money. If you have amenities like a swimming pool on your property, that can also add value.
Another approach is the income method of property value estimation. This assumes that you are considering an income producing property and starts with the net income that the property produces. You can arrive at a capitalization rate by dividing the purchase price of the property by its monthly gross operating income. You can get to this number by examining the owner's Schedule E federal tax return. It will show his income or loss from the property. Get the most recent annual tax assessment on the property from the assessor's office. Look at all of the tenant leases and then all of the utility and repair bills for the year. This is the data that you will need to substantiate the numbers. Also, consider market conditions and how they may impact future rent roles. Of course if you have uses for the property that can make it more valuable, then it will be a good buy for you.
The last of the most common approaches to property valuation is the replacement cost method. This can easily be obtained by calling an independent insurance broker for a quote on what the replacement cost would be for the property on a property and casualty insurance policy. They will base this on a number of factors including the size and square footage of the property, the location and age, the current use of the property and the cost of replacing key systems. The current condition of the property will also impact the valuation. Insurance companies tend to be very conservative, so you can feel comfortable that their numbers will give you the high range of what the property might be worth.
If you use these three methods, you should come to similar valuations. If they don't, then you should re-examine your data and your assumptions and perform the calculations again. If they are close, then you should feel comfortable with a number within the range that they establish.