To anyone whose only real estate experience has been limited to buying residential property, it may seem like property appraisers do little more than agree to sellers’ asking price and then collect a paycheck. While this may or may not be true, in some cases the methodology employed by appraisers, at least the good ones, should serve as a powerful analysis tool for anyone seriously considering investment property.

Professional appraisers are required to have passed rigorous tests and usually go through some sort of appraisal school and may even have some continuing education. Their role in the real estate market is important, as it is partly determining the value of a property and partly just documenting it. Of course, the best appraisers have a sense of integrity and a strict adherence to their methods, but an unexpected appraisal at the last minute can ruin a potentially profitable deal. So while it may be worth paying for a consultation from a professional appraiser—called an appraiser’s opinion because it’s not technically an actual appraisal—the techniques they use are available to anyone diligent enough to apply them.

comparable sales
This is essentially the same appraisal technique used in residential real estate. Basically, the appraiser will find a few properties that are as similar as possible to the one being appraised. To make the appraisal as realistic as possible, they should ideally include some properties for sale, some that were recently sold, and even some that are pending. However, since two properties are rarely very similar, the appraiser will make the necessary adjustments, adding or deducting a certain amount based on the presence or absence of the properties characteristics: pool, plus $1,500; no garage, less $3,000; etc This is basically the same procedure used for income properties with a few minor exceptions; Depending on the property’s price per square foot, this could be a strong factor to consider, or for multi-unit residential properties, the price per unit often comes into play. The drawback of this approach is that many areas are too small to find a suitable group of properties for comparison, and in a rapidly changing market, up or down, it may not be very relevant.

replacement cost
This is an older technique that is really only useful in special cases, like new construction. The idea behind this approach is also to determine how expensive it would be to rebuild the building from scratch. To reach this conclusion, the appraiser first determines the inherent value of the land, given its current zoning, less any buildings or structures on it, then estimates, usually on a cost per square foot basis, the price to build an exact replica of the property. land. actual structure. Again, this approach is more relevant for new construction, since depreciation on the existing structure must be deducted from the estimated cost of construction.

based on income
The most rational approach to evaluating an income-producing property, the income-based approach, actually looks at the NOI, the net operating income. The NOI is the gross income minus the vacancy rate minus any expenses, but not including the mortgage. By dividing the NOI by the sales price, the CAP rate, or capitalization rate, is determined. Typically for any area there is an average CAP rate for any type of property, retail might be 7%, office might be 6%, etc. Once the CAP rate is determined, however, the evaluation essentially reverts to a simple comparison, this time based on the different CAP rates.

Although it takes some education and a considerable amount of experience to rise to the level of a trained, professional property appraiser, with knowledge of the techniques they employ, anyone can become a much more savvy investor.