Real Estate Valuation

There are 3 methods for determining the value of real estate. The market value approach is the approach used to determine the value of home. The income method for businesses. The cost approach is not a market approach and is used for accounting purposes.

1. The cost approach is used by the assessor and accountants to value a property. Because it values each component of a building structurally, it is difficult to use and does not reflect market value accurately. It is an accounting approach and is not directly tied to the market price, which is what a knowledgeable consumer would pay for a particular piece of real estate as determined by recent comparable sales..

2. The income approach is used when valuing income-producing property. Even though residential property is at times rented, the income approach is generally not used.

3. The fair market value comparison approach uses the principle of substitution. The principle of substitution states that the maximum value of your house and property tends to be set by the sales price of an equivalent, equally desirable, similar substitute house and property, for a certain date in time.

The market value or fair market value comparison approach is the standard used for the appraisal industry in valuing residential homes.

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