Real estate portfolios or investment companies require the ability to determine the accurate and up-to-date fair value of their properties. There are two methods in which this can be conducted: a real estate appraisal or a fair market analysis. On the surface they may seem similar, however, these terms mean very different things. 

In most situations, an appraisal is the preferred method and is often a requirement for financial reporting purposes. This is an in-depth process that is conducted by a state-licensed real estate appraiser. 

With an appraisal, there are several ways they can be conducted:

  • Market comparison: An appraiser will develop their valuation by looking at similar properties in the neighborhood that recently sold to establish an estimated price.
  • Income/investment: The income approach to appraisal allows for the calculation of a property’s market value based on the income it’s currently generating.
  • Replacement cost: The cost approach method values real estate by calculating how much the building would cost today if it were destroyed and needed to be replaced from start to finish. It also factors in how much the land is worth and makes deductions for any loss in value, otherwise known as its depreciation. 

Which approach is ultimately used is at the discretion of the appraiser and is usually based on several factors, such as the type of property involved. 

A fair value analysis, on the other hand, is the development of an estimated value of an asset if it were to be bought or sold in an open market without any pressure to sell. To calculate the figure for real estate, valuation experts look at several factors, including sales of comparable properties in the same area, purchase transaction history, and other data points. A quality fair value analysis process will include proper market adjustments based on changing circumstances since the property was first purchased or after prior analysis was completed. 

Developing a fundamental valuation approach has its place, however, in most circumstances, an appraisal is required. Without an appraisal, a real estate portfolio company may not be able to secure financing or meet tax reporting requirements.

At Appraisals Unlimited we can answer any outstanding questions you might have about the distinction between these two terms. We also can satisfy all of your residential and commercial real estate appraisal needs. Our large team of appraisers also offers excellent local knowledge of real estate markets and brokers in all the areas we service. Give us a call at 781-449-7600 or email us at office@appraisals-unlimited.com to get started.