The mortgagee or lender visits the mortgagor or borrower's property for a scrutiny once the interview is over and before his or her mortgage application is taken up for ultimate contemplation. During the inspection, the lender ensures that the property in concern fulfills the requirements vis-à-vis it preferred site, structure and other criteria keeping in view the fact that he might have to sell off the asset to retrieve his investment sum in the case lender fails to repay the amount. What is of utmost significance is the assessed value of the mortgaged property. It is essential that the lender ascertains that the amount being given as loan is contained by the legal confines of the loan to the property's assessed worth proportion. In fact, when the funds are a constraint, most monetary bodies or financial institutions lessen the credit worth percentage lower than the highest permissible amount.
Although many aspects are considered while evaluating a property, we will discuss only a few of them in this article. From the mortgagee's viewpoint the main purpose of the assessment of the property is to make an approximation of the prospective sale price of the property in case the lender has to dispose it off owing to a defaulting mortgagor. In the instance of the property being a new construction, the evaluator normally decides on the market price of the land or ground first and then includes the expenditure on its location or surroundings, concrete surface and the cost of the building itself. In order to make an accurate evaluation of the land as well as the construction, the evaluators remain in constant touch with the realtors. On the other hand, while evaluating a property that has been in existence for a period of time, the appraisers examine the decreasing value of the property and compare the asset with the selling price of similar properties that have been put on sale by their owners. In case of a commercial property, the evaluators take into consideration the substitute price, market value, the capitalized worth or value of items leased as well as the amount of revenue the property would create in future. All said and done, normally the evaluation report of a property or house for the intention of mortgage comprises a brief opinion that is summed up in one page. However, for larger assets or properties, the evaluation or appraisal report is much more detailed as it takes several aspects into consideration.
While talking to a number of mortgagees or lenders on the different aspects of a property they take into consideration before approving a loan, it has come to the light that several factors are responsible for lessening the mortgage capacity of the single family housing assets. Some of the features of a house that lowers it potential of securing a good mortgage comprise location of the property outside the confines of the city, the property has a shared driveway, the house has only one or two bedrooms, the asset is located outside the lending area of the mortgagee, the property is very old and not maintained properly, the building is not safe structural point of view or has no water supply or sewers facility from the local municipality.
In addition to the above mentioned factors, a single family house also faces problems in booking a good mortgage if the building is not in accordance with the norms of the National Building Code, the asset is already on a leasehold (barring under the Home Plan), the owner does not reside in the mortgaged house, the property is subject to pollution and noise, the locality of the property is in an intermediary stage, the house has no or only a limited basement and if the property has some specific kind of fake siding.
During discussions with the lenders, it was also found that they favor certain features of a property that ultimately lead to the enhancement of the mortgage ability of the asset. According to the lenders, a property becomes all the more eligible for a mortgage if the house is new or located realistically, the area has no heavy traffic passing by, the property is located on a plot with lots of trees, and the house has a completed leisure room and where all basic services are easily available.
Normally lenders such as trusts and life insurance companies make use of their own mortgage evaluators, while other creditors like the banks take on private appraisers to assess the value of the mortgaged property. The charges for employing the appraiser has to be borne by the borrower and the amount payable to the evaluator may range between $50 and $100 for each assignment. However, the charges vary a little depending on whether the mortgaged property is new or old. In the instance of a new construction, the appraiser has to do a number of inspections of the site while the construction is on. These assessments are in addition to the appraisal of the building plan as well as the land or site of the construction. It is the borrower who has to pay for the expenses for all these inspections and appraisals. And finally, when the credit is arranged by the CMHC or insured by the organization an amount of $35 is reimbursed to take care of the appraisal and inspections charges of the mortgaged property.
Appraisal of the mortgaged property is essential from the lender's point of view not only because it helps the mortgagee to fix the amount of loan to be given on the said property, but is also important for the creditor in case the lender fails to repay the loan principal as well as the recurring interest charges on it. In case the borrower fails to fulfill the clauses in the mortgage agreement, the lender depends on the resale worth of the mortgaged property to recover his investments. This way, a lender protects him or her from the losses, if any, in a mortgage deal. Owing to such conditions, earlier it was necessary that the borrower had insured his or her property for a sum that was equivalent to the amount of the mortgage credit. This was considered to be practical practice in the past, but over the period the land prices have one up greatly and today a considerable amount of the mortgage loan on the land on which the property exists. Accordingly, owing to the rising land prices, if the insurance on the building equals the mortgage amount, it often becomes more than the value of the loan. Hence, some authorities have termed requiring insurance cover that exceeds the value of the mortgaged property as an illegal practice now. As a result, many creditors have introduced comprehensive policies for the indemnity of all the houses they have mortgage on. It is important to note that the borrower has to pay for the charges for this blanket insurance policy.
Assessment of a real estate is actually an estimation of the value of the property and it is normally undertaken simply owing to the fact that some one has some financial interest in the said property. For instance, a mortgage lender may be planning to give a loan against the property and would like to know the resale value of the asset keeping in view the safety aspect of his investment. Similarly, it may be an investor who is planning to purchase the property and would like to seek an expert opinion on the purchase value of the property. On the other hand, even a sales person may be requested to ascertain the value of a property with the view of registering the real estate for sale. Hence, it may be rightfully concluded that the appraisal or evaluation of a property is assessment of the worth of a real estate.
It is important to note that with the boom in the real estate business the demand for appraisal experts too have been growing rapidly. A real estate evaluator may be required for various purposes such as a sales person intending to sell a property, a customer wanting to buy a property, a real estate developer needing an expert opinion on the value of a property with a view to build up or re-develop the asset, a mortgage lender requiring an assessment of the property to ensure the security of his or her loan, an insurance company wanting to ascertain the insurance worth of a property for providing its owner an insurance cover as well as assessment of the property for fixing tax on the real estate. In addition, a real estate appraiser may also be required to assess the value of a property or estate with the purpose for gifting it, transferring taxes or a division of the property following a divorce by the owing couple. The need for a property evaluator may also arise while confiscating a property.
This article will basically discuss the meaning of term or period assessment in a limited version emphasizing on the issue of evaluating the worth of a real estate or buildings. Assessments for personal assets like pieces of art or antique or superannuated items will not be taken up for discussion here.
Considering the range as well as the significance of the real estate transactions these days, merely possessing miscellaneous comprehension is not enough and here the role of a specialist property evaluator becomes important. Normally, the availability of data regarding real estate is very restricted and quite not easy to get. The reasons for this are many and not difficult to find. To a certain extent this is due to the fact that the revenue amount for real estate is not only small, but also because the real estate market is primarily very restricted. In addition, each deal in real estate property is discrete as well as heterogeneous or varied. Moreover, transactions do not occur frequently with the same real property as it is a hard-wearing product.
As mentioned earlier, it is difficult to find as well as collect data regarding real estate. Hence, it is essential to engage the services of an expert real estate evaluator who would not only collect all the required information, but also interpret or construe them. It is interesting to note here that while it is essential to employ a real estate appraiser in almost all real estate transactions, there is no requirement for any evaluator in dealing with common stocks. This is despite the fact that the stock market is not only national, but also global and transactions in stocks occur more frequently, almost every day. In addition, unlike the real estate market that is heterogeneous, the stock market is more homogenous where one stock of a particular company is identical to any other stock of that company. Taking all these into consideration, it may be concluded that the transactions in the real estate market is of more significance compared to the stock exchange dealings and hence the need for a real estate appraiser in all property transactions.
Although evaluating real estates or properties is essentially a specialized job, one would be surprised to learn that it is not necessary for appraisers in most provinces in Canada to possess a license or certification. What is more amazing is that any ordinary person in British Columbia (B.C.) is free to take up a property appraisal job and even charge a fee for it! To be precise, anyone, even a layman who has no familiarity or information regarding the real estate market is free to describe them as appraisers and can take up the job of evaluating a property. On the contrary, people who are authorized to perform the evaluation task do not call them appraiser, but take up the task of evaluating the worth of a property when it is being registered for transaction. Actually, people who have undertaken widespread training in real estate evaluation and have sound knowledge on the subject offer approximations of the value of diverse and complex assets that may comprise indigenous Indian land as well as a golf course. Since a lot of individuals are engaged in providing real estate property appraisals these days, it is essential to differentiate between some kind of guesswork done by a section of people on the pretext of property evaluation and those appraisals that are prepared following methodical research.
All the way through this article the word 'appraisal', 'assessment' or 'evaluation' entails that the approximation of a property's worth is done by an individual who has successfully obtained the ability and comprehension that is essential to fulfill and execute specific and pertinent rules. The individual who is able to undertake and perform such tasks skillfully is known as an appraiser or evaluator. Nonetheless, the courts of law may decree that even a common man undertaking the task of an appraiser is accountable for his or her actions while performing the job of evaluating a property or real estate. For instance, the courts may rule that since a real estate sales person has the desired ability and guidance for undertaking property evaluation, legitimately he or she too is accountable for the approximations of a property prepared by him or her.
It is important to mention here that the absence of authorization for evaluators to carry out their work does not entail that appraisal or evaluation of real estate is a new-fangled area or occupation that is not controlled by any organization. In Canada, presently there are plenty of semi-skilled as well as private or independent appraisal organizations and groups that are functioning at ease. Many of these appraisal associations even extend training programs and award a certificate or title on successful achievement of the course. Besides this, a number of associations offering training and learning programs for real estate sales persons also incorporate appraisal as a separate subject in their educational course or program.
The fiscal worth of a house or store is often talked about in such a manner that seemed that these properties were the focus of appraisal or evaluation. To understand this better we may use two examples. For instance, we often hear an individual saying "the worth of my house is $100,000" or a real estate evaluator mentioning that "I appraised a factory that is worth $650,000". People talk in such expressions or phrases as they are not only brief, but also easy to use. In this article, you will find plenty of such phrases for reasons mentioned just now. However, at the same time, it is essential to ensure that the usage of such phrases do not create any doubt over the fact that physical properties are never the theme of any appraisal. In fact, instead of the physical property, it is the worth of the legal interest or legitimate significance of the real estate or property that is evaluated by an appraiser. Here the term 'legal interest' denotes the 'legitimate ownership rights' on the property. Hence, the real theme of any appraisal is the specific ownership rights conferred on a specific section of a real estate or property.
There are different aspects of the legal interest in a physical property and they may well comprise fee simple ownership that denotes absolute ownership of any real property, a leasehold estate wherein the possession interest in land is held by some type of deed from the person who grants a lease (landlord), and condominium ownership where the proprietors have ownership to individual units and a balanced share in the common property. In addition, the legal interest in a real property may also include air space meaning the fraction of the atmosphere on top of a property, easement denoting the privilege or freedom to do something or the entitlement to thwart someone else from doing something over the real property of another person as well as permutation of all the separate interests mentioned here.
Once you have comprehended that the privileges of proprietorship is what is appraised, it gives rise to two deductions:
It may be mentioned here that the ownership rights on a real property may vary owing to disparities in the lease periods, mortgage term, restraining agreements or covenants as well as laws prevailing in the different zones. For instance, think about two neighboring stores that are similar is all physical aspects. Now the fee simple owner or the landlord of Store A has rented out his property to a person for a sum of $1,500 every month, while the proprietor of Store B has also chartered his property on the same lease conditions for a monthly rent of $1,350. Now, considering the fact that both the leases are for similar period of time or number of years, the value of the Store A proprietor's interest should be greater as he gets an additional $150 every month during the entire lease period. It may be seen that in these two instances, the properties are similar vis-à-vis their physical features, but the ownership rights are different in the case of Store A and Store B. Hence, dissimilar ownership rights on properties will largely influence the value of the property or assets. While evaluating such properties it is essential for an appraiser to take into consideration the influence of the disparities in the ownership rights on a property.
It is essential for an appraiser to probe into these possession rights for it is as imperative as conducting an assessment of the physical property itself. The fact remains that the appraisers are not bound to give their personal views on the different legal deeds that term the ownership rights. Nevertheless, the appraiser is required to collect data regarding the ownership rights of a real property from the experts. There are numerous instances when appraisers refuse to accept the liability for examining the legitimate interests in a real estate and prefer to take it for granted that the asset or property is controlled in fee simple with an unambiguous deed.
Although it may appear to be practical when an appraiser refuses to accept the accountability vis-à-vis the legal aspects of a real property, it is essential that he or she should get hold of the necessary legal know-how when it is needed. This is because if an appraiser simply presumes that a real property is held in fee simple ownership, he or she would not be taking into account crucial information that may be influencing the value of the concerned real estate or property.
Here the significance of proprietorship privileges has been highlighted with the view that this crucial issue if often ignored by the appraisers. Moreover, it should be borne in mind that the physical aspects of a property, like the condition of the building or its site, also influences the value of the ownership rights that are being evaluated. In brief, we may say that the value of a property is the outcome of two inconsistent factors - the rights of ownership and the real property on which the privileges are conferred upon. Hence, it is pertinent that any change in any of these factors is likely to alter the value of the real property ownership.
Now that its has been highlighted as well as established that the real theme of a real property evaluation or appraisal denotes the privileges as well as responsibilities of proprietorship, we should next try and focus on the implication of the term value. This is essential as the assessment value or worth of a real property is subject of an appraisal or evaluation. It may be mentioned here that there are some disagreements among the appraisers themselves over the efficacy of different techniques of evaluation of a real property and this is largely owing to the fact that which evaluator uses the term 'value' in what particular logic.
Usually, the evaluators are interested in a value or assessment of a real property that that is computable vis-à-vis cash. When we say this, many may ask whether the value of a property or real estate is equivalent to its cost. They may question that if a product is sold or available at $10, should the amount be considered as it value or the value or worth of the product is somewhat dissimilar to its price. Now, here is a case in point. For instance, a person who plans to sell his car will most likely not dispose it off at any price offered to him or her, but will only do so in a situation when he or she gets a certain minimum price. The eagerness or anxiousness of the buyer to obtain the cash will actually determine the minimum amount for which he or she will sell the vehicle.
It may be noted here that the minimum or lowest price acceptable by an owner to sell his or her asset, whether it is a car or a real property, is also known as the floor price. On the other hand, even the potential purchaser will also have a minimum price to buy the property or the car and it is known as the ceiling price. Hence, it may be said that to make a sale effective it is essential to have at least one prospective buyer whose ceiling price will either be equivalent to or more than the owner's floor price for the asset or property. Thus, when the ceiling price is more than the floor price, it is easier to bargain a transaction or sale. On the contrary, if the ceiling price is more than the floor price of an asset, either there will be no transaction or either the seller or the buyer will have to revise their respective prices.
Here is another case in point. Suppose the floor price of a seller is $15,000 for the car and the buyer has a ceiling price of $18,000. Therefore, it is very natural that during the bargaining process both the seller and buyer would try their best to obtain the best or most favorable price for themselves. In a very normal situation, the seller may begin with asking for a price that is much higher that his or her floor price, and in response, the purchaser would offer something that is less than his or her ceiling price. The bargaining will carry on and finally both will settle on a price that is called the actual sales cost or the 'value in exchange'. Finally, as an instance, presume that the asset or car is sold for $16,200. This will make the deal easier and benefit the seller as well as the purchaser.
From the above mentioned instance, two things can be inferred. It is important that during the entire deal the seller is not supposed to know the ceiling price of the purchaser, while the buyer should not be aware of the seller's floor price. This is the primary reason for both bargaining for the deal to materialize. If this does not happen, there is no scope for any negotiation for the transaction. In fact, the real sale price will be determined by on the bargaining abilities of the seller and buyer and on their eagerness to finalize the deal. In the instance of a seller has some trouble in getting a buyer, it is likely that he would agree to sell the car at his or her floor price or an amount near it. Contrarily, if the seller has just placed an advertisement for the sale and the first buyer offers him a very low price, the seller may be eager to wait for some time to see if anyone makes a better offer.
Let us get back to the instance of the car sale mentioned earlier to understand things in a better perspective. Now, in this transaction, there were three prices - floor price, ceiling price and the sale price. It may be noted here that as in this case, the sale price if often different from both the floor price as well as the ceiling price. So, which should we consider as representing the value of the car? In this instance, the floor price of the car for the seller was $15,000, while the ceiling price of the buyer was $18,000 and the sale price was $16,200.
During an appraisal of an asset, both the floor price as well as the ceiling price is denoted as the value of the property to the owner and in this case the term owner not only means the seller, but also the buyer or the prospective owner of the property. Now if we are only aware of the sale price, and not the floor and ceiling prices, it would be unfeasible to ascertain the precise value of the property to either of the owners - the seller as well as the buyer. It has been often seen that the seller normally prefers to keep his property or asset on the market for quite some time with a view to get a better price and during this period the minimum price or the floor price of the property may vary. Likewise, buyers also do not like to hurry while making a purchase, but prefer to have sufficient time to ponder over the acquisition. The truth is that neither the seller nor the buyer is always sure about a floor or ceiling price. In reality, floor price and ceiling price are only present in principle, but neither of them is deliberately worked out in each and every transaction.
There are many such instances when a property is listed in the market for sale, but is ultimately pulled out from the market and come back as unsold. One may ask why such a thing happens. The answer will not be difficult to gauge if you look at the market trends carefully. Normally, in such instances, the floor price of the seller is substantially higher that the ceiling price of any prospective buyer. Here is an example. Take a situation where a potential buyer will make a succession of tenders wherein the last offer will be higher that the previous one till he or she touches the ceiling price. Many a times it happens that the seller does not accept even the last offer or ceiling price of the prospective buyer. In such a situation, either the potential buyer will have to depart from the transaction or raise the ceiling price to match the floor price of the seller.
In such cases, the prospective buyer's actions are likely to be influenced by substitute properties or another property that is considered to be as attractive by them. This means that when a potential buyer states that a particular price for a specific part of land is the maximum that they can afford, they mean to say that they are willing to buy another property that they find equally desirable at an identical worth. It is really an irony that contrary to this a successful shopper would most often say that he was ready to pay even more for the property he has acquired. Similarly, a seller may also assert that he or she has got much more than they had expected from the transaction. On the other hand, you will find many sellers who would complain that they received much less than the worth of the property in the transaction, while buyers would often grumble that they coughed off more than what was required. The last case makes one wonder whether the buyer has received less than his or her floor price or the seller has shelled out more money than his ceiling price.
Very often disenchanted buyers may feel that they were excessively hopeful regarding the proceeds form the property concerned, or may feign that they had some other property at their disposal and at any given time it would have been a better buy. However, the fact remains that if these frustrated prospective buyers could read their future accurately, they would have taken a different course of action. On the other hand, it is possible that sellers who complain that they have received less than their expectations for the property they have sold may have come to the conclusion following retrospection. It is possible that they were in a haste to sell the property for their personal needs or they might have miscalculated (or worked out a lower price) the floor price of their property. In brief, their estimation was wrong. All said and done and not considering the regrets or frustrations, it has often been seen that once the sale process of a property has been completed, both the seller and buyer react differently. While the sellers pretend that they would have preferred to retain the property to accepting the money, buyers show that instead of the newly acquired property, they were happy with their cash.
The cost of an available alternative or substitute house or property decides the ceiling price of the buyer when the asset is acquired for the purpose of the owner occupying it. In the same matter, the worth of the alterative or substitute properties also affects the sale price of a house or real estate. As all people do not have similar opinions about the advantages of acquiring a particular house or property, it is understandable that they will not offer or disburse the same amount for the same home. For instance, one person may agree to pay a higher sum to purchase a house located near the market, another person may actually lessen his or her ceiling price for the property because they think that a house near a market may not suit their requirements.
The value of a property to an owner, including the seller and the prospective buyer, is basically an individual calculation that reveals the specific traits of a person. Hence, it is very tricky for another person, a third person in this case, to ascertain the individual value accorded to an exacting property by a particular person. And the appraisers may consider them to be lucky for they are rarely asked to ascertain the value of a property to the owner. In fact, the two specific cases where an appraiser is solicited to settle on the value of a particular property to the owner are when the property is being confiscated or when an investment analysis or endowment assessment is required. The appraiser is very often asked to find the value of the property to the owner in the instance of an investment analysis and this value is provided after the appraiser has explored the owner's tax standing as well as the investment deals on the property. Before the implementation of the Federal Expropriation Act of 1972 in Canada, the value of a property to its owner was considered to be the general base for paying the damages in case of an instance of confiscation. However, with the enactment of the new legislation, the federal government of Canada has made it clear that the market value of a property should be considered as the base for any payment towards damages.
The damage payments for the confiscation of a property in British Columbia (B.C.) depend on the statutory or legal description of the market value. In addition to this, in some cases the owner of a property may even get a 'reasonable disturbance' damage award or payment. The owner of an expropriated property may obtain this additional payment or 'reasonable disturbance' damage award to cover the expenses incurred in moving his assets.
It may be mentioned here that it is important to comprehend the procedure accompanying the sales deal of a property and the manner in which the sale price of the property is ascertained while finding out the subjective or individual value of a property to its owner. As mentioned earlier, the sale price of a property must be at least equivalent to or more than the seller's floor price, which is also the value of the property to the first owner, for a sales transaction to take place. At the same time, the sale deal can materialize only when the sale price of the property is equal to or lower than the ceiling price (the value of the property to the second owner) of the buyer. During any appraisal or evaluation procedure of any property, these two perceptions of value, i.e. the sale price and the value to the owner (seller and buyer) play a crucial part.
During the evaluation, an appraiser is normally implored to establish a number of factual assessments of the value of the property to the owner. The objective measures of the value of the property to the owner is normally recognized by using prefixes like the value eligible for insurance, value for lending, value that is purview to tax, real value as well as the market value. It may be mentioned here that amongst all these factual values, during the appraisal it is most difficult to asses the market value. In order to understand the expression 'market value' of a property, it may be best described as the anticipated or projected sale price of the real estate. The market value of a real property suggests a transaction that possibly will or may well take place. On the other hand, the sale price indicates a deal that has already taken place.
Basically there are four procedures to conduct the appraisal of a real property and one may choose from any of them according to his or her requirement. These four different appraisal methods include comparative or market method, investment or income method, cost method and the residual method. Below is a brief discussion to provide an understanding of each of these procedures.
The evaluation carried out according to the comparative or market procedure actually entails pulling together and studying different market sales data of comparable properties that have been sold before. In this procedure it is taken for granted that the market value of the property in question is equivalent to the price paid by the buyers for parallel properties sold in recent times and works on the rule of substitution or alternatives. The comparative or market method of appraisal is a much uncomplicated, correct and the most widely employed procedure provided the appraiser is able to collect good market sales substantiation or data. This method of appraisal reveals the market trends and necessitates the least individual estimation from the appraiser. It is advisable that whenever it is feasible, an appraiser should adopt this method to evaluate the real property value as the comparative or market method presents the most dependable approximation of market value.
It may be noted here that the comparative method of appraisal is the most suited procedure for appraising the market value of assets that are alike in their category like single family houses and apartments or condominium units. However, if one is trying to find the market value of a particular property substituting it with the value of another type of property that has been recently sold, the comparative or market method may not prove to be helpful. To be more precise, this method of appraisal may not work while evaluating the market price of industrial constructions for these types of building possess dissimilar property distinctiveness like their dimension, substances used in construction, height of the ceiling, rail service, loading doors, compartments and other features.
On the whole, if one is adopting the comparative or market method to evaluate the market value of a property, it is assumed that if a number of similar assets have been sold for $75,000 each lately, the property concerned should also have a market worth of $75,000. In this case it must be borne in mind that the subjective property is similar in all respects to the properties already sold before. In reality, an appraiser may not find two properties that are same as far as the seller and buyer's interest in the asset is concerned, but they may very well locate two properties that are comparable as far as the opinion or interest of the buyer and seller in the market is concerned. While following the comparative method to evaluate a property, it is important for the appraiser to identify what the participants in the market or the buyer and seller deem to be identical.
When evaluating the market value of a property according to the income or investment procedure, it is believed that the seller and the buyer (also known as the market participants) act like the market value was equivalent to the existing worth of the prospective remaining advantages that may be obtained from an asset or property. This method is most effective when it is possible to assess the prospective net advantages that may be received from a property. And this is the primary reason why this method is used while appraising commercial properties or assets that are capable of generating income.
Appraising the market value of a property requires an appraiser to scrutinize the advantages that may be derived from the asset in future. These potential benefits from the property include gross income or proceeds before taxation, net income as well as cash flows or the money received and spent. Appraisers are able to assess the market value of the property concerned from the outcome of the study of these potential benefits.
Even as this appraisal approach is much different from the comparative and market method, it basically uses the rules of the comparative method. This is owing to the fact that information regarding the market value of the similar properties sold recently is required to evaluate the rental stages, working costs and even the sale prices. Judging by the above statements, it may be safely concluded that the investment or income method of appraising the market value of a property is simply a modification of the comparative and market procedure.
While appraising the market value of a property following the cost method, it is generally taken for granted that the worth of a property can by no means be more than the expenditure that will be incurred in substituting the asset. In this approach it is also believed that the deflated price of a property to be equivalent to the market value of the property in the instance of specific, but restrained situations. On the whole, this approach presupposes that the market value of a property is equivalent to the cost of the unoccupied land and the expenditure to be incurred in constructing the building. However, in the instance of the property not being a new one, the appraiser will have to subtract the downgrading cost from the cost of the house.
Most appraisers find the use of the cost method to evaluate the market price of a property very interesting and it is also said to be the easiest as well as most accurate procedure. The opinion of the appraisers in this regard notwithstanding, this approach is possibly the most inaccurate procedure to estimate the market value of a property because in reality, the cost of a property and its market value may not be essentially identical at any given moment. At the same time, calculating the depreciation value of a very old property or building is often very problematic.
The residual method of appraising the market value of a property is different from all the previous three approaches and is utilized only if a property has any hidden or dormant significance. In this approach, the appraiser first ascertains the market value of a projected new building or the market value of an under construction structure on its state of being finished employing other evaluation procedures like the comparative or market method or the investment or income method. Next, the expenditure of constructing a new building is subtracted from the projected market value of the building on its completion. The variation or difference between the cost of the new building and its estimated market value is the value of the land. This procedure is also known as the 'residual approach' as the land has a dormant value for it can be used for redevelopment and hence its value is said to be the residual sum.
It is interesting to note that the residual method also has a modification that works out the significance of the building as the residual sum or amount as a substitute of the land. While assessing the market value of a property using this modified approach, the value of the land may be ascertained by adopting the comparative or the market method, but the value of the construction remains unidentified. The downside of the residual method is that it may not be possible to employ the comparative or market approach to assess the market value of the land in the instance when there is no record or evidence of recent sale of similar sites with equivalent latent value or possibility of developments. The residual method is seldom used to evaluate the market value of a property, but it is definitely an effective and important approach to assess assets that possess the makings of being developed in the future.
Before we wrap up this the topic of selecting the suitable appraisal method, it is pertinent to note the importance of an appraiser making up his or her mind on any one or more of the above mentioned four approaches to assessing the market value of a property. Although it is often not easy to select the most suitable method to appraise a property correctly, the absence or restrictions on information on the real estate market transactions sometimes prove to be useful in limiting the choice of an appraiser. Here is an instance to substantiate the statement. Supposing an appraiser is solicited to ascertain the market value of a church, he or she will not be able to find any market data on the subject and hence will not be able to use the comparative or market method or the investment or income approach. In this instance, the appraiser will be compelled to use the cost procedure.