property nerds®home valueapproaches to value
Three ways to value a home
Appraisers have three ways to value property: compare it with recent sales, add up what it would cost to build, or price the income it can earn. Most homes are valued by sales, but the other two explain lot value, teardowns, ADUs and rentals. Here’s each one, with calculators.
The three approachesCost calculatorIncome calculatorReconciling them
- sales comparisonSalesclosed sales, adjusted to the home
- costLand + buildless wear, for new or unusual homes
- incomeRent ÷ cap ratefor duplexes to fourplexes and rentals
- an appraisal needs3+closed sales for the sales approach
the three approaches
Sales, cost and income
The same home, three questions: what do buyers pay for homes like it, what would it cost to build, and what is its rent worth?
approach 1most homes
Sales comparison
What buyers paid for the closest similar homes, each adjusted for its differences.
- Carries the most weight for a home bought to live in.
- Needs enough recent sales close by.
- Our Comps Finder runs the first steps live.
approach 2new and unusual
Cost
The lot’s value plus what it would cost to build the house new, less depreciation.
- Fits new construction and homes with few comparable sales.
- Rests on a good lot value and a real build cost.
- Says nothing about what buyers will pay for the design.
approach 3rentals
Income
Net operating income divided by the cap rate buyers accept for that kind of property.
- Fits duplexes to fourplexes and rental houses.
- Shows what an ADU’s rent can add.
- Swings widely with the cap rate.
cost approach
The cost approach: land plus the house, less wear
What the lot is worth, plus what it would cost to build the house new today, minus depreciation for age and wear. The defaults are an example only; enter your own.
Value by the cost approach
income approach
The income approach: what the rent is worth
Net operating income divided by a capitalization (cap) rate. It fits rentals and shows what an ADU’s rent can add. The defaults are an example only; enter your own.
Value by the income approach
reconciliation
Reconciling the three
An appraiser doesn’t average the approaches; they weigh the one that fits the property best.
- A home bought to live inSales comparison carries the estimate; the cost approach is a check on newer homes.
- A new or custom homeThe cost approach carries more weight when few sales compare.
- A big lot or a teardownLand value leads: what the lot sells for, with or without the house.
- A duplex to fourplex, or a home with an ADUThe income approach carries more weight, checked against sales of similar rentals.
- When the approaches disagreeA wide spread is a signal: the comps are thin, the cost inputs are off, or the rents don’t match the price buyers pay.
go deeper
Every way we value a home
live toolfor owners
Comps Finder
The eight closest sales to your home from the last 180 days, each adjusted to your size and lot, plus what’s for sale near it now.
live toolfor owners
Home Equity Check
Your purchase price at your city’s pace, minus what you owe, with what selling would cost and how much of the gain is taxed.
guidevaluation 101
Home Valuation
Five values for one home: market, list, appraised, assessed and the online estimate.
guidesellers and buyers
Comparative Market Analysis
How comps are picked and adjusted, with an example grid you can check line by line.
guidebuyers and sellers
Home Appraisal
How the appraisal works, what a gap costs and how often homes here sell over asking.
guideowners
Online Home Value Estimates
What a formula sees, what it misses and how wide one city’s prices run, live.
questions
Questions we hear
Which approach do appraisers use for a house?
For a typical single-family home, the sales comparison approach carries the most weight. The cost approach is often added for newer homes, and the income approach for rentals.
What is a cap rate?
Net operating income divided by price. A 4.5% cap rate means a buyer pays $100 for every $4.50 of yearly net income. The lower the cap rate buyers accept, the higher the value of the same rent.
What is a gross rent multiplier?
Price divided by gross yearly rent. It’s a quick screen, not a valuation, because it ignores vacancy and expenses.
What is effective age?
How old a home acts, not its calendar age. A 1960 home with a new roof, systems and kitchen can have an effective age of 15 years.
Why can the cost approach miss the market?
It adds up land and building costs; buyers pay for what they want. A dated layout can be worth less than it cost, and a home in high demand can sell for more than land plus building.
Can an ADU raise my appraised value?
A permitted ADU can, when the appraiser finds sales of homes with ADUs to compare. The income approach shows what its rent can support.
more to learn
Keep going
- What’s my home worth?An instant estimate, then a Property Nerd checks it against your street.
- Comps FinderThe eight closest sales to your home from the last 180 days, adjusted to your size and lot, live.
- Home Equity CheckYour purchase price at your city’s pace, minus what you owe, with what selling would cost.
- Home ValuationMarket, list, appraised, assessed and online values: who sets each and which one matters when.
- Comparative Market AnalysisHow an agent picks comps, adjusts them and turns them into a price range.
- Home AppraisalHow the appraisal works, what a gap costs and how often homes here sell over asking.
- Online Home Value EstimatesWhat a formula sees and misses, with a live look at one city’s price spread.
- Then & Now CalculatorWhat a price from any year since 2012 is worth now, by city.
- How Much Over AskingThe Silicon Valley overbid in dollars, by year, city and price band.
- Lot Value LabWhat a bigger lot adds, city by city.
- ADU guideState rules, costs and a payback calculator for an ADU.
Estimates and examples for discussion only; not an appraisal, and not tax, legal or lending advice. Sales data: MLS via IDX, deemed reliable but not guaranteed. Equal Housing Opportunity.
talk to a property nerd
Valuing something unusual?
A big lot, a teardown, a duplex or a home with an ADU: we’ll run the approach that fits and show you the comps behind it. Commissions are negotiable, and we offer bundled services, so ask us what’s included.
Eric & Janelle Boyenga
Realtors DRE01254724 / 01254725
Realtors DRE01254724 / 01254725