We have four methods for estimating value in real estate, and each approach serves a purpose. In fact, one method could be used to qualify or confirm the results of another valuation.
• Appraisal: An appraisal is an opinion of value determined by a professional, licensed appraiser. Most typically, a lender orders an appraisal in order to ascertain if a property is worth the buyer’s contract price. The lender wants to make sure that the property is worth at least the sales price. The appraiser selects closed sales for properties that are comparable to the subject home and in a similar, if not the same, neighborhood. These are properties that have sold within the past six months.
• Comparative Market Analysis (CMA): The CMA is a realtor’s most common pricing tool. Most often, a CMA is used to help set a home’s listing price range. The real estate professional evaluates the active, pending, and sold comparable properties in the same or similar neighborhoods.
• Broker Price Opinion (BPO): A licensed real estate professional prepares a BPO to valuate the most likely selling price of a property. Very often a lender in a short sale, REO, and foreclosure property will order a BPO. This opinion provides a value trend analysis.
• Automated Valuation Model (AVM): An AVM is a software that provides property valuations based on mathematical modeling and proprietary algorithms. ATMs use tax assessor’s value, available data on the specific property, and statistics of like-kind property sales in order to determine a property’s value. They do NOT factor in the condition of the property and do NOT physically evaluate the property—which can make it less accurate than the other three methods. For example, Zillow provides AVMs called “zestimates” for properties and also offers a “zestimate range.”
Although all four provide an estimate of value at a specific time, the most accurate is probably the appraisal. This method calls for both a physical inspection and a strict comparison/contrasting of the subject property with any like-kind property.
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