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Three Approaches to Value
There
are three ways to determine the value of anything, and
each plays a part in property appraisal.
Direct Sales (Market) Comparison
Approach:
The most widely-used and accepted in commercial
practice is the direct sales comparison approach.
This approach bases its opinion of value on
what similar properties in the vicinity have sold for
recently, with appropriate adjustments for time,
acreage, living area, amenities and so on. It is
these adjustments where the expertise of the
professional appraiser becomes necessary -- no
computer can tell you how much or little to adjust
for a fireplace without knowing the neighborhood or
even talking to Realtors and recent buyers in the area
about how important that amenity is in that particular
location.
Cost Approach:
Another
approach is the cost approach. How much
would a property cost to replace, that is, rebuild,
minus "accrued depreciation," that is,
depreciation that has occurred since the property
actually was built? The cost approach includes
concepts like "economic life" and
"effective age" that are mostly of use in
determining the value of special use properties,
special purpose properties or properties where
subsequent structural improvements greatly impact
value.
Income Capitalization
Approach:
The third approach to value is called the
income approach. Some properties generate
income for their owners -- the most obvious examples
being rental properties such as apartment buildings,
non owner-occupied industrial, retail, or offices and
the like. The rental income an owner might
reasonably expect from a property is part of its
value. For a purely owner-occupied residential
property, this may not be applicable, but it can be
important if the property is to be rented out or used
otherwise to generate income, such as a storage
facility, cell tower rental and office building.
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