There are several types and definitions of value sought by a real estate appraisal. Some of the most common are:
- Market Value – This is the estimated value for which a property could exchange between a buyer and seller. This type of transaction is most often one done with open knowledge between two parties regarding the property’s
- Investment value –This is the value an investor may purchase a property for and if oftentimes higher than a market value.
- Insurable value –is the value of real property covered by an insurance Generally it does not include the site value.
Property valuation is at the heart of the real estate industry and is vital for investors, brokers and property owners to do business. Property appraisers use various methods to provide estimates, which vary depending on the purpose of the valuation. Property investors must have a clear understanding of the principles of valuation and which type of appraisal is best suited for each transaction.
Estimated Sales Value
The estimated sale value of a property is based on the sale price of comparable properties in the same area in the last 3 years. According to the Finance Department of New York City, this is the property value type most often used for small residential properties.
The assessment value of a property is used to calculate the property taxes a homeowner must pay. It is calculated by multiplying the market value of a property–appraised by a government appraiser–by the assessment ratio applicable in the property’s jurisdiction.
The liquidation value of a property is the value you would expect to receive if you were forced to sell it quickly in a low-demand market. According to the U.S. Small Business Administration, this value is at least 20 percent less than its retail value. This is a type of market value that depends on the reason for the liquidation such as the distribution, division, sale or conversation to cash of personal property, business assets or inventory by settlement, agreement or legal Liquidation values assume there is some amount of duress in making the sale. It may be based on an orderly liquidation value if a period of a few months is available to make the sale or a forced liquidation value if the sale must take place usually in under 30 days.
The investment value of a property is based on the income it can generate during its useful life. This value is used to quickly estimate the value of an investment, but should only be used in conjunction with other methods, as it does not take into account important factors like the growth and decline of potential income. This value is obtained by dividing the net annual income of a property by its capitalization rate. Although there are different methods to calculate the capitalization rate of a property, the general idea is to divide the net annual income it generates by the property’s current value.