When an appraiser goes to determine the fair market value of a property, they will use different approaches (or methods). If you are dealing with single family houses, you'll probably only see appraisals that use the Comparable Market Analysis (CMA). You may find that how you determine the value is lot more different than professionals
Evaluate Property Value in Canada
1. Assessment Value (Property Tax bill)
This is very powerful strategy which can give you the edge against all your competition. Ask the property owner to show you the current Property tax assessment notice. By looking at the number you can make an instant offering 30-40% below that value. Most of the time the assessment value is much lower than the current market values are. Remember the early bird gets the worm.
2. Comparative Market Analysis (CMA)
Under this method, value is determined based on the comparable value of other similar properties in a given neighborhood. The subject property is compared to others that have recently sold in the immediate area and which have similar property characteristics. For houses, condos, and small rental properties, the Comparative Market Analysis (CMA) is by far the most common method used. Keep in mind that you only look at recent sold ones and the time frame it took to sell them. If there are too many for sale, you should do more due diligence before making an offer.
3. Income Approach (Cap Rate)
This is simply crunch the numbers approach. The Income Approach is often used to help determine the market value of commercial properties where income and expense statements can be compared to other businesses with similar characteristics. A property's value can be expected to vary slightly from year to year subject to changing market conditions. Caution must be taken to consider all other factors to determine the final value.
Although generally used for commercial properties, this method is occasionally used for income-generating single family homes where no "comparable" properties exist.
4. Potential (Change of Use)
This can be goldmine versus buying a lime, especially when you are purchasing agriculture land which will be rezoned to residential , or commercial use. If the rezoning have been approved from agriculture to residential or commercial, the value of the subject property will be huge.
5. Cost Approach (Replacement Value)
The Cost approach is the least common method used by appraisers. It a determination of market value based on the current replacement cost of any improvements plus land value. This method is used when a property is unique and there are no comparables. Value is determined based on the cost to replace the improvements (the buildings) to the property.
Improvements consist of development of the land and construction costs. The determination of replacement costs will consider the size and type of construction of any improvements and will also consider its age in order to deduct any depreciation.
Now that you know several ways to evaluate property value, you will know how to communicate intelligently to any appraiser who is appraising the subject properties. This is basic knowledge for Real Estate investors.
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The above information is provided as a guideline and is not intended to give a professional legal advice. Please consult a real estate lawyer for their opinion on your particular case
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