Figuring out what a property is worth is a complicated process. Most real estate markets are relatively inefficient, making it hard to perfectly predict a property's value. At the same time, it can be difficult to define value. Property values can be figured in different ways, including the value of the land by itself and the value of the land and building, as estimated by a professional property appraiser.
Properties have different valuations for different purposes. A land value helps you figure out what the underlying value of the property would be if the house was gone. It can be useful in figuring out insurance or in doing your taxes. On the other hand, an appraised value, which is a professional opinion of the worth of a property and its improvements, can be used by lenders to determine loan amounts or by estates to value the property that they hold.
Calculating Appraised Value
When appraisers calculate a value of the property, they typically start by visiting the property and the surrounding market. Once they have a good understanding of the property, they apply three valuation methods. For income properties, they value the property based on the income that it generates. Unique and new properties frequently get valued based on their construction cost. Most homes and existing properties get valued through the sale comparable approach by which the appraiser looks at what similar properties have sold for to estimate a value for the property under consideration.
Calculating Land Value
Land values are calculated similarly to appraised values, but with one key difference. Before valuing the land, the appraiser must step back and ask herself what the land would be best used for. After determining the "highest and best use," the appraiser typically uses the sales comparison method to figure out what the land is worth by itself.
Investments and Home Offices
Land values are particularly useful when you have an investment property or a home office. The Internal Revenue Service lets you write off a portion of your building's value every year as depreciation or, if you have a deductible home office, its proportional share of your building's annual depreciation allowance. It doesn't, however, let you write off your land value. You can use the difference between your appraised value and your land value, if both come from your property assessor, to calculate how much you can write off as depreciation.
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