How does the appraiser estimate value?

Generally, there are three basic approaches to value. The Cost Approach , the Direct Sales Comparison Approach , and the Income Approach . The appraiser will utilize one or more of these methods (defined below), by weighing the strengths and weaknesses of each approach.

Within the Cost Approach , the appraiser will first estimate the value of the land, then calculate the cost to replace or reproduce the building and any site improvements. Finally, deductions will be made for depreciation and/or obsolescence of the improvements.

The Direct Sales Comparison Approach (also known as the market approach) utilizes recent sales of other properties that are similar or comparable to the property being appraised. The appraiser will make adjustments to each of these sales for differences (i.e. size, quality, condition, location, changes in market conditions, etc.), which will provide a range of value indications for the property being appraised. The appraiser will correlate this range into a single value indication.

The Income Approach is based on the assumption that an investor owns the property being appraised. The income that could be generated by the property is the determining factor in estimating value from this approach. There are a variety of methods that can be utilized in the Income Approach, but the most common is Direct Capitalization.

Through Direct Capitalization, the appraiser will consider any current leases that encumber the property and will analyze rents of similar properties to estimate the potential rental income that could be generated by the property being appraised. Deductions will be made for vacancy and operating expenses to derive at a net operating income. Value is estimated by capitalizing this income figure (dividing net operating income by a rate of return demanded by the market).