Real estate appraisal, property valuation or land valuation is the process of developing an opinion of value, for real property (usually market value). Real estate transactions often require appraisals because they occur infrequently and every property is unique (especially their condition, a key factor in valuation). The location also plays a key role in valuation. However, since property cannot change location, it is often the upgrades or improvements to the home that can change its value. Real estate appraisal forms the basis for mortgage loans, settling estates, taxation, and so on. But often an appraisal report is used to establish a sale price for a property.
In this blog, we show you an introduction to the basic concepts and methods of real estate appraisal and the foundations of real estate appraisal, especially with regard to the buying and selling the property.
What is the difference between an Appraisal and a Valuation?
Property valuation: A property valuation determines the exact price or value of the property through a formal process.
Property appraisal: A property appraisal does not indicate a definitive value but a rough figure given by the agent or real estate professional. An appraisal is simply an estimate or an opinion of a property’s current market worth, considering what the market is responding to and other factors. This is usually offered as a free service by real estate agencies.
How is the property value determined?
Technically, the value of the property is defined as the benefits that the owner of the property gets from owning the property. Unlike many consumer goods, the benefits of real estate ownership generally come over a long period of time. Therefore, estimating the property’s value must take into account economic and social trends, as well as government regulations and environmental conditions that may affect the four elements of value:
- Demand: the desire or need to own the property, and this desire or need must be supported by money in order to satisfy the desire.
- Benefit: the ability to meet the desires and needs of the property owners in the future.
- Scarcity: the limited supply of competing properties to be purchased.
- transferring ownership: Ease of transferring property ownership from one person to another.
Ten factors that affect the price of real estate:
- The economic conditions of an area will have an effect on people’s ability to sell or buy an investment property.
- There are other factors that have a significant impact (laws, regulations, and general legislation), which are laws related to privatization, leases, construction, demolition, licenses, and other elements.
- People’s desires and average income are among the economic and social conditions that affect real estate valuation.
- Income plays a role in the price of the property, so the price is affected by the return.
- Supply and Demand, the push and pull of supply and demand has a major influence on the value of property. If there is a high demand but fixed supply, the price of properties will rise as more people attempt to buy.
- The expectation of future prices, which is related to the real estate market, future investment and the prices of buildings and units are greatly affected.
- Production factors that compare the price of real estate in different regions.
- Also, there is something that affects real estate values called (Alternative opportunity cost).
- The properties could be comparable in terms of Year built, Location and the space.
- The environment is one of the most important factors that have an impact on the type of building directly and it is called (natural factors).