In the vast majority of the divorce cases we handle, the parties own real property. Sometimes that property is a primary residence, while other times the property takes the form of a lake cabin, vacation home, investment property or business property.
Generally speaking, the equity resting in each piece of real estate is subject to equal division among the parties. It is, therefore, appropriate to determine how the parties will realize their equity. Will they sell the property and split the proceeds? Do they agree on the value of the property? Or, is an appraisal of the real estate necessary because one party wishes to keep the property and “buy the other side out.”
When an appraisal becomes necessary, there are a number of approaches utilized by the professional hired to value the property. They are characterized as the:
- Cost Approach;
- Market Approach;
- Income Approach;
- Investment Value Approach; and
- Development Cost Approach
The cost approach involves a determination of what it would cost to rebuild the same property from scratch. This includes not only the structure itself, but also the improvements to land that would be necessary to complete the sale and take ownership. This approach is typically reserved for relatively new construction.
The market approach involves a comparison of similar properties that have recently been sold. Comparable sales offer a measuring stick based on recent economic activity. So as sufficient data is available, the market approach is most often relied upon in determining the value of a traditional home.
The income approach involves market value being determined as a multiple of profits derived from the use of the property. What would a willing investor pay to receive a return of “x?” Naturally, the more earned from the property, the higher the value of the property itself. This approach is often used to value investments, such as apartment buildings, commercial office buildings and shopping centers.
The investment value approach (rather uncommon) applies to property with sophisticated metrics for measuring the benefits, both short and long-term, associated with a piece of real estate. The more highly unique a piece of property, the more likely the investment value approach will be utilized.
Finally, the development cost approach may be utilized in a situation in which the parties own raw, undeveloped land. Questions involving future use and development potential, and then profits that may arise therefrom, are taken into account.