Have you ever wondered why your bank’s appraiser set the value of your property far lower than you thought fair? Or had your insurance company offer a policy that barely covers your decade’s worth of improvements ? And how come those values seem so different from the sale price your neighbour recently achieved a few doors down? Exactly how does one establish a fair and realistic value for property?

In the complex world of real estate, there are a number of bonafide approaches that can determine the value of a property. Each approach has its merits, though the end opinion on how much your property might be worth can vary dramatically.

Here are the three most common approaches:

Cost Approach

The first approach calculates the actual real costs associated with property development. Basically, the evaluator takes the cost of all components which make up your property…the land value based on its location, the cost to build a property similar in size and finishes and the cost of upgrades specific to your property like landscaping or a swimming pool. After discounting the property for age and pending repairs, one can establish the replacement cost of your property. This approach is often used by insurance companies, though it does not take into account the intangible features of a property, like historical ambience, unique setting, views and vistas, or in some instances, neighbourhood prestige or building reputation.

Income Approach

The second is the income approach. In this instance, the property’s value is analyzed based on the existing or projected rents the dwelling could generate. By adding the total income flow and deducting all the operating expenses (property taxes, building insurance, utility costs, repairs and maintenance, and some allowance for possible vacancies), one can determine the net income. Allowing for a reasonable rate of return on the capital investment required (a reasonable rate of return is generally more than those generated in secure investments like money markets but less than higher risk stock ventures), one can establish a financial value for the property. In this instance, absolutely no emotion is involved to determine a sentiment-free value. A bank might use this prior to approving a mortgage for the property in question.

Market Value Approach

A third approach estimates the market value of a dwelling. In this instance, one compiles recent sales of matching properties in a similar location in order to create a tangible framework for comparison. Sales of similar units in your building, or of houses on your street, are used to start. Then, properties having the same size and features, like private parking or comparable renovations and upgrades, are integrated into the analysis. Further to this, adding properties with similar intangible benefits like vistas, architectural merit, or additional accessory income (like a basement apartment) refine the value matrix and effectively establish the market value of the property. This analysis is subjective, as it estimates a value for the intangible qualities your property may have that others don’t. Given it can never be exact, a market value approach presents a range estimating the sale price of your property might expect to command on the open market given a reasonable amount of time without undue pressures or influence.

Do you have questions? As real estate specialists who monitor trends and markets in housing, we offer consumers insight and assistance in making rational and educated decisions about real estate. If you are thinking about buying and selling, call us for a pressure-free consultation that will quickly put the realities of today’s housing market in perspective. Offering savvy insight and expertise for over a decade in Toronto, we are your pro-urban housing specialists. Specializing in renovated and restored character dwellings, low-maintenance living, revenue-producing income properties, and loft conversions, call us now at 416-322-8000! Or check our website at urbaneer.com for our current promotions, past newsletters and our Custom Housing Profile that helps you identify your next move!

We’re here to earn your trust, then your business.

Steven Fudge, Sales Representative
& The Urbaneer Team
Bosley Real Estate Ltd., Brokerage • (416) 322-8000
http://www.urbaneer.com • info@urbaneer.com