Valuation of real property is an important and often complex process involving the services of professional appraisers.
Certified appraisals, performed by a licensed real estate appraiser, are often required by lenders before approving a loan secured by a property. Basically, the lender wants to ensure that, if the borrower defaults on his/her loan, that there is enough collateral to cover the remaining loan amount.
In general, there are three approaches to valuing a real property:
- Sales Comparison Approach: Comparing the subject property to other similar properties that recently sold (comps).
- Cost Approach: The cost to build a property similar to the subject property.
- Income Approach: Placing a value on the future income streams of commercial or investment properties.