4 Types of Real Estate Appraisals
Determine your home’s value with the right type of appraisal
A real estate appraisal is a critical step when you’re looking to buy or sell a home. Appraisers determine house value using various methods—knowing the difference between the types of real estate appraisals can help you make the most informed decision in a real estate transaction. There are four main types of real estate appraisals: market value, cost approach, income approach, and sales comparison approach. We’ll explore the differences between each type as well as when you should choose one over another.
1. Market Value
A market value appraisal is the most common type of appraisal for residential real estate and combines several approaches to arrive at an appraisal value. These appraisals are comprehensive—a local house appraiser will look at property data, inspection results, market conditions, comparable property sales, and more to determine the appraisal value.
Because this type of appraisal has so many contributing factors, a bad inspection or low comparable property sales can hurt the home appraisal value. Still, you’ll receive an appraisal that fairly considers more factors than other types.
By combining market and sales data analysis with a physical assessment of the property, the appraiser can accurately determine the fair market value of a home. These home appraisals can cost more than other types due to their comprehensive nature, as the combination of approaches takes more time and labor than using just one.
| Pros | Cons |
|---|---|
| Comprehensive analysis | More expensive than other types |
| Satisfies lender and insurance requirements | Appraisal report may take extra time to prepare |
| Considers various factors | More time spent on your property |
Best for: Meeting lender requirements, obtaining insurance, determining market price for buying or selling a house
2. Cost Approach
The cost approach determines the value of a property by calculating how much it would cost to rebuild or replicate it. This approach first figures how much it would cost to replace the building, using current labor and material costs. It then subtracts any depreciation from the replacement costs to account for loss of value over time. It also factors in the land appraisal value, which is determined from property records or a physical land appraisal.
Because material costs and depreciation factor so heavily into this approach, it’s most useful for newer buildings. It’s also helpful if there aren’t many comparable properties (comps) to use for sales comparisons. It is, however, a less comprehensive approach than market value, so it may not be the most accurate way to determine value.
| Pros | Cons |
|---|---|
| Good for properties without many comps | Less comprehensive |
| Helps determine if purchasing is a better value than building | May need to be combined with other approaches |
| Useful for new homes | Must be able to obtain land value |
Best for: Newer homes, properties with unique features
3. Income Approach
The income approach is used for buildings that are expected to generate income. It’s most often employed for commercial buildings but can also be useful when considering purchasing a multi-family house, apartment building, or other revenue-generating dwelling. With this approach, the appraiser uses market rental rates and other income data, as well as rental demand, current vacancy rates, and expected operating expenses, to determine value.
This approach is strictly based on potential income, so it’s less useful for owner-occupied buildings, since owners won’t be paying rent. The income approach can be helpful when combined with other approaches for those looking to purchase a second property strictly for rental income.
| Pros | Cons |
|---|---|
| Outlines income-generating potential | Unsuitable for owner-occupied homes |
| Determines if a rental property is a good investment | May need to be combined with other approaches |
| Takes operating costs into consideration | Less comprehensive |
Best for: Multi-unit homes, apartments, rental properties expected to generate income
4. Sales Comparison Approach
The sales comparison approach determines a property’s value by comparing it to sale prices of similar properties in the area, known as “comps.” It takes into account recent sales data, market trends, and local property values to arrive at a fair value. This approach is widely used because it compares similar properties that have recently sold with similar local amenities and features.
The sales comparison approach is a significant contributing factor to determining market value, and, when combined with other data like inspection results and other property details, gives an accurate analysis of a property’s value.
| Pros | Cons |
|---|---|
| Compares like properties | Need to be combined with other data for comprehensive results |
| Takes local market data into consideration | Needs recent sales data on comparable properties |
| Widely used and accepted valuation | Can be altered by outliers |
Best for: Residential purchases in areas with recent sales
The Importance of Home Appraisals
An accurate appraisal is critical to ensure you’re making an informed decision when it comes to a real estate transaction. Both appraisals and inspections provide necessary information about the property you’re buying or selling, so it’s important to cover all of your bases with the right services from trained professionals.
In most cases, buyers pay for an appraisal, so receiving an accurate assessment of the property’s value is necessary to make the right choice about buying a house. Sellers can prepare for a home appraisal to get the best appraisal value, but a comprehensive appraisal will take a wide variety of factors into consideration to arrive at a fair and accurate value.
