Today let’s discuss more basic terms of real estate appraisal, after all, an investor absolutely must know more than just real estate comps in order to make deals happen.
Value in Use
This relates to the net present value (NPV) of the property use. The NPV is the difference between present value of cash inflow and outflow. For example, a home buyer wants to purchase a property. He estimates the future cash flow that the property would generate. Then, he discounts the cash flow into a lump sum value amount. Let us say $450,000. If the home owner sells less than $450,000, the home buyer considers in purchasing the property.
It is the amount that the investor would pay to acquire the property. The Investment Value may be higher or lower than the fair Market value.
The Insurance Policy covers the value of the property which is the Insurable Value.
It is the property which the appraiser evaluates or analyzes. The Appraiser analyzes the location, amenities, and condition of the subject property to arrive to the fair market value.
Comparables or Comps
Appraiser compares the subject property to another similar property. The similar property is called Comparables or Comps. With the information from Comparables or Comps, the Appraiser calculates the fair market value of the subject property.
These are a few basic terms that I felt should be under every investors belt. The basic knowledge each term provides makes for a more savvy investor!