How Much is Your Home Worth? Get an Estimated Home Value

Home value can be estimated using three main approaches which include cost approach, comparable sales approach, and the income approach (Scarret & Osborn, 2014). The three approaches measure the market value of homes. They also give the open market value of the homes, as well as, the foreclosure value of the homes. Cost valuation of homes takes into consideration the costs that are incurred in building the homes (Scarret & Osborn, 2014). The cost method includes the costs of all the materials that are used, as well as, the costs of labor. The sales comparable approach uses the recent sales principle to measure the value of homes while the income approach applies the principle of income generated by the homes. 

Home value can be measured using the methods that compare the value of the home to the recent sales of the similar property in the neighborhood. This method applies the principle of comparison and substitution. In this estimation, the comparable is identified and the costs of the recent sales are recorded (Scarret & Osborn, 2014). The one that best identifies with the property, therefore, is used as the main comparable that determines the current value of the property. This method of valuation, however, fails to investigate the reason for the sales of the property used as a comparable. The sales comparable approach determines the value of the homes at the present market value. 

The cost approach is an estimation method that looks at the costs that are involved in building the home. This method adds all the costs of building the home and other overheads that are essential in erecting the structures of the home. The cost approach is more accurate on the newer homes compared to those homes which have been in existent for a longer period of time. The cost approach takes into considerations the costs of acquiring the materials, costs of labor, and the costs of purchasing the land. Costing approach employs the summation of all the costs involved in constructions of the buildings and the home value of the properties is taken as the value of building the home. 

The main advantage derived from using cost approach is that it can be used to estimate the value of income generating properties as opposed to the other methods (Pagourtiz et al.2003). However, the main disadvantage of the cost approach arises from the fact that it is difficult to obtain the data for capitalization and also selecting capitalization rate is also difficult. The cost method favors the construction of new buildings, the method also provides evidence for the low marketability of the properties and real estate buildings. The cost method can also be used in the estimation of costs of rehabilitating the buildings, the costs involved in remodeling and the costs involved in the building of a new system. 

The cost approach of valuation is essential in planning for development of new buildings and developing the buildings while taking into consideration the costs which are involved in putting up the structures (Scarret & Osborn, 2014). Depreciation and appreciations can be tracked in the process. The cost approach is also important in providing evidence for the development of the buildings and in the cost estimations of different projects. Costing in the cost approach remains one of the most essential valuation principles that are used to determine the value of the property (Pagourtiz et al.2003). Valuations are important in planning. 

Income approach of estimating home value focuses on the valuation based on the series of cash flows generated by the property. This method is essential in estimating the value of a residential property or a commercial property. Mortgage value can also be estimated using the same process. Income approach focuses on the rent analysis and the rent payable on the properties (Pagourtiz et al.2003). However, the value of homes using this method fails to take into consideration the intrinsic value of the property. The income approach measures the investment worth of the property and what is considered to be the essential part of investing in the business. 

Income approach as a method of estimating the value of a project revolves around the amount that is generated by the project. In the case of real estate, income approach can be used to measure the value of commercial properties and residential properties. The income approach reveals the market value of the property and the expected values. The approach is one of the most preferred approaches in estimating the value of investments. This approach, however, cannot be used to measure the value of matrimonial homes and homes which do not generate income. The income approach, however, appraises the investment based on the returns. 

The market value of homes measured by the three approaches refers to the amount which the home would fetch in the current market based on the willing buyer and willing seller basis. The amount that the property will have when all the factors are taken into consideration is also the market value. Market value can be estimated by the sales comparable approach, cost approach, and income approach. The market value of the homes depends on several factors that include the demand for the homes and the available homes which act as the supply of homes. The other forms of values include foreclosure values and the mortgage values of the homes. 

Foreclosure values are the insurance value of the homes which is obtained when the home is facing foreclosure. The foreclosure values can also be measured using the income approach, sales comparative approach, and the cost approach. The commercial banks and other financial institutions, however, affix certain percentages of the market values as foreclosure values (Scarret & Osborn, 2014). The valuation procedures reveal a rough estimate of what the product will cost in the current market. The processes and approaches used to estimate the value of homes also take into considerations various factors which include the location of the house, the design and the intrinsic values of the homes (Pagourtiz et al.2003). What the homes would fetch in the current market is also a factor of supply and demand in the markets. 

Comparative sales approach makes some adjustments to the market values of the homes that are observed in the market (Scarret& Osborn, 2014). The comparable sales approach follows a structured process that starts with comparing the similarity with the comparable property. The characteristics that are used to identify similarities include; the number of bedrooms, number of baths available in the home, the parking lot available and the size in terms of square footage (Scarret & Osborn, 2014). The second property considered should be near the original property being valued. The nearness defines the similarity and the neighborhood of the properties. The date on which the property being compared was sold should be the most recent date while avoiding the properties which were sold a long time ago because such properties provide inaccurate sales data for the comparable. 

Different adjustments made on the comparable sales approach data include adjustments on the date and the locations. The process of valuation involves getting the unit sold per square foot then multiplying the value by the total square foot of the subject to get the value. The value obtained is then used in getting the value of the home (Scarret & Osborn, 2014). Other addendums may include the costs involved in the fixtures and fittings for the house. The value of the new home is essential in finding the mortgage value of the home and the insurance value thereafter. Sales comparative method is one which has been used owing to its ability to indicate the market value of properties. 

The main advantages derived from the comparative sales approach are that it reflects the market value of the properties (Pagourtiz et al.2003). This makes the value derived to be used in the mortgage value, foreclosure values, and even the market value itself. The method is easy to use and also easy to understand, this makes the spread of the process to where it can mostly be used and understood across the world. People understand the comparative sales approach more than any other method of valuation of properties. The comparative approach is also based on the principle of substitution which makes the process achievable and measurable based on the specified process. 

The main disadvantages of comparable sales approach of estimating the value of homes are that there is a challenge in ascertaining the reason for the sales, this leads to failure in reflecting the market behavior in the sale of homes (Scarret & Osborn, 2014). When inadequacy in terms of data is witnessed then there is the impossibility of applying the system to measure the value of homes. The accuracy of the method is also a subject of appraiser’s ability to identify and apply the data in the approach. This approach also presents the disadvantage of only perceiving the historical data only. It fails to sufficiently test the data on the present market value. The fact that no two properties can be identical also presents a challenge in this form of valuation (Scarret & Osborn, 2014). 

Problem 

The subject = 4 bedroom 1 swimming pool 

Comparable 

5 bedroom 0 swimming pool=110,000 

4 bedroom 0 swimming pool=101,000 

3 bedroom 0 swimming pool=104,000 

The average less swimming pool= (22,000+25,250+29667)/3 25,639 

The value of the subject= (25,639*3) +15,000 

= 117,555 118,000 

The value of the subject according to comparable sales price is $118,000 

References  

Pagourtzi, E., Assimakopoulos, V., Hatzichristos, T., & French, N. (2003). Real estate appraisal: a review of valuation methods.  Journal of Property Investment & Finance ,  21 (4), 383- 401. 

Scarrett, D., & Osborn, S. (2014).  Property valuation: The five methods . Routledge.