4 Cases When / Why The Cost Method Is Used For Pricing Real Estate

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In the vast majority of instances, professional real estate agents, assist their homeowner – clients, by using what is referred to as a CMA (Competitive Market Analysis). In this approach, real estate professionals look at similar properties (referred to as comparables ) and compare them with the house they seek to sell (known as the subject house). They take into consideration and prioritizing using very similar properties for comparison. These may include factors such as: area; size; condition; features; etc. For example, if a certain Comparable had certain key features (such as an extra bedroom, garage, nicer property, certain upgrades / updates), the value of those features would have been subtracted from the Comparable , and applied to the proposed pricing for the subject home. Similarly, if the subject house has been sold, in a creating a listing price. However, in certain instances this method can not be used effectively, so let's review 4 cases, why / when using the Cost Method should be utilized. This method considers what the total costs implied may be, considering renovations, depreciation, expenses, etc.

1. No comparables: This may be due to a number of factors, and those would suggest using this approach. For example, one selling a new house, where there are no others sold in the area. Another possibility is a certain unique property, either due to size, features, etc. This unique character may either be a positive or negative one!

Second Unique usage: I'm sure you've seen certain properties re-purposed, yet probably not considered the challenges to pricing involved. How would you use the usual approach, when a firehouse, old school, re – cleaned garage / gas station, religious institution, etc, were involved?

Third Needs lots of improvements: We've all witnessed properties marked as Handyman's Specials. If the cost of improving a property is extensive, the cost approach may be the more appropriate one!

4th Renovations (replacement versus reproduction): Extensive renovations are generally priced by their replacement costs, meaning they would cost to bring the property up to a specific standard. On the other hand, there may be instances where one must exactly reproduce a property when it is renovated, such as for a landmark property, etc. These scenarios generally indicate the competitive market approach, which is probably not the appropriate one!

Real estate agents do not appraise homes – only Licensed Appraisers do that! However, they often assist their clients in determining the listing price.

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Source by Richard Brody