Real Estate Valuation

The Holy Trinity of Real Estate Valuation

Ever wonder how appraisers come up with a number for a home? It's not just a dartboard and a blindfold, I promise. They use a trio of tried-and-true methods, and understanding them is like having a real estate superpower. Think of them as the three musketeers of property value, each with its own special move.

1. The Sales Comparison Approach

This is the one you probably know. It's the most common for homes and works on a simple principle: your house is worth roughly what a bunch of similar houses in your neighborhood just sold for.

An appraiser finds three to five recently sold homes ("comps") that are like yours and then plays a game of financial "I Spy." Did your comp have a bigger yard? Subtract a few thousand. Did it have an old, rusty oven? Add a few thousand back. The appraiser adjusts the comp's price for all the differences until they have a solid estimate. It's all about finding out what the market is willing to pay.

Best for: Your typical residential home. In a nutshell: "That house over there sold for this much, so your house is probably worth... about this much."

2. The Cost Approach

This is the method for the unique, the new, and the just plain weird. It asks, "If this house vanished in a puff of smoke, how much would it cost to rebuild it from scratch today?"

The appraiser adds up the cost of building the house (using modern materials, thank goodness, so no more avocado-green kitchens unless you ask for it!), then subtracts the "old-age wrinkles" (a.k.a. depreciation from wear and tear). Finally, they add back the value of the land. This approach is perfect for that funky pyramid-shaped house down the street or a brand-new custom build where there are no comps to compare it to.

Best for: New construction, schools, firehouses, or that one house that looks like a spaceship. In a nutshell: "It's worth what it would cost to build again. We just have to subtract for the leaky roof and the disco wallpaper."

3. The Income Approach

This is for the savvy investor who sees a property not as a place to live, but as a money-making machine. The Income Approach values a property based on the cold, hard cash it can generate.

The appraiser figures out the property's Net Operating Income (NOI)—that's the annual profit after all expenses, but before the bank takes its cut. Then they use something called a Capitalization Rate (Cap Rate), which is basically a market-based number that converts the income into a valuation. This approach is all about the cash flow. It's why a six-plex in a bustling area can be worth a whole lot more than a brand new single-family home.

Best for: Apartment complexes, office buildings, rental properties, and anything that pays rent. In a nutshell: "The value is in the rent checks, not the paint color. Show me the money!"