Thursday, August 15, 2013

Good To Know: Appraisal

I have been sending many offers out lately insulting many realtors and property owners in the process. I have been contacted by realtor justifying the listing price and the value of the properties in the area. I agree with them, they are right.

Properties are appraised in three different ways. There is the cost approach, direct comparison approach and the income approach.

Cost Approach: This would be today's cost to purchase the land and construct the building to replace the subject property after depreciation.

Direct Comparison Approach: This compares the subject property to similar properties that have sold in the market place over the past six to twelve months depending on the market activity.

Income Approach: This calculates today's value of the future income of the subject property by analysis of current and future cashflow and actual or anticipated income.

Realtor's use the direct comparison approach as they should, but for a Buy/Rent/Hold property I want to add to my portfolio I use the income approach. With some of the properties I've purchase, the income appraisal is higher then the direct comparison appraisal, that is a great deal for me. Sometimes (most of the time) the income appraisal is much lower then the direct comparison appraisal. This is when my offers offends the realtors and sellers.

Here is a copy of an appraisal I had done on a property in the past.

Cost Approach:

Direct Comparison Approach:

Income Approach:

We ended up with three very different amount. I expected to get an average of all three but that was not how it worked out. Here is the summary of my appraisal:

I found it odd that the appraiser averaged the value to $217,500 when the average was around $234,500. The reason is because he was looking at an other amount; the accepted offer. I had an accepted offer at that time to purchase this property at $197,000.

My sister was upset with a neighbour a while ago. She owns a town house and the neighbour put his up for sale. He was a motivated seller, eager to sell and accepted an offer that was below the property value. Going forward that sell as significantly affected the Direct Comparison Appraisal on her property and those of her other neighbours.