Knowing Your Property’s Worth: 5 Real Estate Appraisal Principles to Abide By

improve property value tips

Ready to sell or not, you should know your property’s worth. It affects your property taxes, and you should know how your property is faring in your real estate market.

Knowing its value, for instance, will help you decide on pursuing home improvements or property development. But, the real motive for securing the services of a real estate appraiser is buying, selling, or refinancing a home.

According to Jim Rendon in The New York Times,

Before anyone can buy a house with a loan from a bank or refinance a mortgage, the lender needs an objective assessment of the property’s value — after all, the home is the bank’s collateral for the loan. Assessing the value is the job of the appraiser.

Real estate appraisers are expected to abide by 5 principles:

  • 1. Principle of Anticipation requires the appraiser to estimate the present worth of future benefits for the property. The appraiser determines the anticipated utility for the property, that is, what the property can be used for.

    People buy property for its future benefits. But, the appraiser adjusts those anticipated benefits to a present value. For instance, the anticipation of utility or benefit would increase the price of a house with a pool.

  • 2. Principle of Demand, Supply, and Desire recognizes the economic principle that the scarcity of a real estate product influences its value by creating demand. A home’s value will be affected by the supply of homes with the same square footage, similar lot size, or location on view lots.

    Conversely, if the supply is abundant, the value goes down. In addition, supply and demand are affected by desire. Depending on current or looming socio-economic conditions, people may desire a property, but that does not constitute demand if investing does not seem possible or prudent at the time.

  • 3.Principle of Substitution helps appraisers identify alternatives that satisfy the same customer wants. For instance, a buyer may want 3 bedrooms and 2 baths, so the appraiser prices the property against alternatives on that profile.

    The appraiser calculates the cost obtaining a like site and construct a similar property to set a price on the appraised property. This can be difficult to understand, but LJ Hooker can help.

  • 4. Principle of Progression recognizes improvements in nearby properties, advancements in the community, and access to new amenities all increase the value of your property.

    Conversely, the Principle of Regression reduces the value of your property when surrounding properties, the community, and amenities decline.

  • 5. Principle of Contributory Value add value of a part to the value of the whole. A principle from the world of value theory adds the component value to the whole property.

A new roof or an structural addition may contribute value. But, an amenity like a swimming pool may or may not add anything in the eyes of buyers who won’t use the pool. Likewise, refinished cabinets or new appliances may or may not add value depending on the volatility of the housing market.

Knowing your property’s worth

New Zealand’s Ministry of Business, Innovation, and Employment recommends securing an independent appraisal. Professional appraisers are licensed only after completing extensive coursework and internship hours. Real estate appraisers must be objective third parties with no financial or personal connection to any person in the transaction. They are bound by ethics, standards, fiduciary responsibilities, and professional standards established by professional organizations. So, know what your property’s worth only once you are satisfied with your appraiser’s professional status.

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