Essential Values in a Property’s Lifecycle
This post is part of a series sponsored by CoreLogic.
Accurate valuation is critical to the main functions of the real estate industry. From listing a property to taking out insurance, there are three critical moments when the property is assigned a unique value – market value, estimated value, and insurance value.
According to the Federal Code, the market value is defined as the most likely price that a property should achieve under all the conditions necessary for a fair sale in a competitive and open market.1 For laypeople, market value is the price for which a buyer is willing to pay a Possession. For professional real estate companies, market value often includes the value of land, improvements to land, buildings, and sometimes personal property and intangible assets.
Appraisers are often hired by their lender clients to inspect properties and determine market value based on factors such as location (e.g. waterfront, golf course views, etc.), condition, features, layout, and sales of similar properties in the local community.
The determined value is a value calculated by the local property tax officer. Property tax officials are responsible for determining the value of a property so that it can be properly taxed. Because valuations are often carried out at regular intervals (typically every one to three years), the value obtained may not keep pace with fluctuations in the local property market.
Instead of evaluating one property at a time, the appraisers estimate the value of an entire neighborhood at once. They do this using mass scoring techniques.
Computer Aided Bulk Valuation (CAMA) defines any software package used by the government to generate property valuations for property tax calculations. These programs use mathematical models (multiple regression analysis) to determine the relationship between the selling price and other real estate characteristics such as the number of square meters or the age of the property. This relationship is then used to calculate the property valuation.
Bulk appraisal programs are particularly effective because they take data from all sales and don’t use limited data from just a few comparable properties. This also removes any bias when appraisers decide which property is classified as comparable.
The insurance value corresponds to the costs that would be incurred to completely rebuild a property. This is a value used by insurance carriers to determine the coverage limits for a policy, which are included in the annual premium calculation
The insured value includes the cost of demolishing the existing structure, removing the rubble, and building the structure at the present time. This means that future escalations in prices for labor and materials as well as new building codes, construction plans, site access and permits are taken into account.
Why value matters
Insurance carriers understand the need to use “insured value” for Cover A to ensure that if their property is lost, their policyholders receive the appropriate rebuilding payment. However, a common point of confusion for homeowners is the inconsistency between the cost of rebuilding (insurance coverage) and market or valuation values. Many homeowners mistakenly assume that the cost of rebuilding will be the amount they paid for the property. Rebuilding costs are typically higher than market or valuation values because they take advantage of current material and labor costs in a given geographic area.
Another point of confusion is often the term “replacement cost new” used by the auditing and evaluation industry. Often times, replacement cost new uses building codes and labor and material costs at the time the property was built rather than using today’s rules and costs. They also do not include costs for demolition, waste disposal, and site accessibility that are common in post-disaster rebuilding scenarios. The replacement cost is not recommended as a way of determining the cost of rebuilding a home.
It is important for consumers to understand how value is defined and the role each value plays in the life cycle of a property. Brokers, appraisers, insurance carriers, and the data used to aggregate the valuations are critical to ensuring that the property valuation is carried out correctly.
- Controller of currency. 12 CFR § 34.42. Retrieved from https://www.law.cornell.edu/cfr/text/12/34.42
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