Typically, home values are based upon comparable homes that are generally located in the same area, with specific additions or subtractions for features that add or detract value from the property.

There are exceptions for when a home has no comparable (either much more exclusive, or hardly salvageable). In these cases, the home's sales price may not reflect the owner's investment.

From the sources...

Liquidation value -- may be analyzed as either a forced liquidation or an orderly liquidation and is a commonly sought standard of value in bankruptcy proceedings. It assumes a seller who is compelled to sell after an exposure period which is less than the market-normal time frame.

It is important to distinguish between Market Value and Price. A price obtained for a specific property under a specific transaction may or may not represent that property's market value.

Many factors go into determining home value. The square footage and number of bedrooms and bathrooms plays a large part. Typically, larger homes with more bedrooms and bathrooms increase the home value. There are several other features that help determine home value. Does your home have a magnificent view? Is it on a private lot or cul de sac, or close to public transportation? All of these can add to its value. School districts can greatly affect value, and the age and condition of the home are also factors.

There are three general groups of methodologies for determining value. These are usually referred to as the "three approaches to value":

- The cost approach
- The sales comparison approach and
- The income approach

The cost approach was formerly called the summation approach. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. The value of the improvements is often referred to by the abbreviation RCNLD (reproduction cost new less depreciation or replacement cost new less depreciation). Reproduction refers to reproducing an exact replica. Replacement cost refers to the cost of building a house or other improvement which has the same utility, but using modern design, workmanship and materials. In practice, appraisers use replacement cost and then deduct a factor for any functional disutility associated with the age of the subject property.

The Comparitive Market Analysis (CMA) examines the price or price per unit/SF area of similar properties being sold in the marketplace. * Similar properties are of similar square footage, number of levels, age of the home, condition of the home, and area proximity of the subject home. Simply put, the sales of properties similar to the subject are analyzed and the sale prices adjusted to account for differences in the comparables to the subject to determine the value of the subject. This approach is generally considered the most reliable if adequate comparable sales exist. In any event, it is the only independent check on the reasonability of an appraisal opinion. Comparables used by appraisers are considered "worthy" or able to be used by the appraiser if they were sold within the last 12 months of the appraisal date of the subject property. Some appraiser are allowed sales only witin 6 months of the subject property. This differs with each company that is hired to appraise the subject property.

The income capitalization approach (often referred to simply as the "income approach") is used to value commercial and investment properties. Because it is intended to directly reflect or model the expectations and behaviors of typical market participants, this approach is generally considered the most applicable valuation technique for income-producing properties, where sufficient market data exists to supply the necessary inputs and parameters for this approach.

Liquidation price is not equivalent to the auction price, as the auction price may have artificial constraints.

When the entity auctions a foreclosed property the noteholder may set the starting price as the remaining balance on the mortgage loan. However, there are a number of issues that affect how pricing for properties is considered, including bankruptcy rulings. In a weak market the foreclosing party may set the starting price at a lower amount if it believes the real estate securing the loan is worth less than the remaining principal of the loan.

In the case where the remaining mortgage balance is higher than the actual home value the foreclosing party is unlikely to attract auction bids at this price level. A house that went through a foreclosure auction and failed to attract any acceptable bids may remain the property of the owner of the mortgage. That inventory is called REO (real estate owned). In these situations the owner/servicer will try to sell it through standard real estate channels.

In regards to real estate auctions...

Absolute Sale

The absolute sale is the purest, and in many cases, the most successful form of an auction in terms of getting the highest price for personal property and real estate. With this type of sale, the asset is sold regardless of price. This sends a strong message to the bidding public that the asset will be sold for sure on auction day. Buyers can justify their time and effort knowing the asset will be sold on auction day at their price. If the buyer feels he or she can buy the asset at his or her price, then the buyer is more likely to bid. The buyer also realizes that a bid must be submitted because the asset will be sold on a certain day and that there is "no tomorrow" to negotiate with the seller. Through aggressive bidding, true market prices can be obtained at the auction. While the seller has a risk of being forced to sell the asset at a price that is too low, the advantages of this type of auction far outweigh the risks.

Reserve Sale

With this type of auction there is no published amount at which the seller agrees to sell the asset. The high bid is subject to the seller's confirmation typically at the auction or within two business days after the auction. This method protects the seller from selling the asset for too low a price. The motivation for a buyer, once again, is that they may be able to obtain the asset at his or her own price, not the seller's price. A seller may offer a cash payment or inducement to the highest bidder if that bid is rejected, which is called a buy–back fee. This indicates to the bidders that their efforts will be rewarded if they are the highest bidder and a sale does not occur.

Minimum Bid Sale

This is a hybrid of the absolute auction and reserve auction. With the minimum bid offering, the seller determines a minimum price level above which he/she is committed to accept. This type of sale is effective only if the minimum bid is low enough to stimulate buyer’s interest. If the minimum bid is too high or near market value, potential buyers will often be discouraged from inquiring, inspecting, and therefore buying the asset. Minimum bid levels can be difficult to determine in soft, slow markets where real value cannot be readily determined. This method of sale can both attract buyers and protect sellers from offers that are too low.
Source(s):
http://www.realestate.com/TipsAndTools/Pricing-Your-Home/Determine-Your-Hom...
http://en.wikipedia.org/wiki/Real_estate_appraisal
http://www.ricklevin.com/FAQ.aspx
http://en.wikipedia.org/wiki/Foreclosure#Foreclosure_auction

Asker's Rating:

Permalink | Report