For those that are thinking of entering the field of real estate investing it is imperative that you begin to get a grasp on the ability to appraise the value of a home. When you are investing in real estate it is important to remember that there are no NADA values placed in books like there are for car dealers and other large purchase items, this is all on you! In order for you to get started, this is truly just the tip of the proverbial iceberg; here are a few more things to think about when you are appraising a home in the beginning of your real estate investing future.
To understand the comparison sales method of appraising a home you must understand that the one of the only fair and reasonable ways to appraise the value of a home is based on its “comparison” to other similar homes in the area. Sure, this home may have more sentimental or emotional value to someone or may be closer to the restaurants you like, but that doesn’t matter. This number is based on comparing the value of the home’s features and amenities in addition to its size.
Understanding the income method is a little more difficult, it is based on the net income that a property produces, meaning you must do some tricky math. Start by looking at how much the previous owner made on the property in the previous year and compare this to the country property appraiser’s numbers at the local office, then look at the rental agreements for the past year. Next, you should add the numbers of ALL bills involved with the home, meaning, the water, sewage, gas, etc. Then wrap it up with a look at recent improvement and repair costs put into the home.
Replacement cost methods aren’t too difficult to determine, but if they are for you then you can usually get a free one by contacting an independent insurance broker. It is quite simple, just divide the square footage of the home by the total cost (1,500 SF / $100,000= $66.66 per square foot) to get your final number. Good luck on the start of your real estate investing career!
