- METHODS OF APPRAISING PROPERTIES
There are three approaches to consider in making a market value estimate. These approaches are:
- Sales comparison approach. Recent sales and listings of similar type properties in the area are analyzed to form an opinion of value.
- Cost approach. This approach considers the value of the land, assumed vacant, added to the depreciated cost new of the improvements. This is considered a substitute or alternative to buying an existing house.
- Income approach. The estimated potential net income of real property is capitalized into value by this approach.
Not only does each parcel of real estate differ in some respects from all other properties, but there are many different purposes for which an appraisal may be made. Each variation of purpose could result in a considerable, yet logical, variation of estimated value. For example the nature of the property, whether non-investment, investment or service; the purpose of the purchase, whether for use, investment or speculation; and the purpose of the appraisal, such as for sale, loan, taxation, insurance and the like, all constitute matters which will influence the proper methods of appraisal approach and the final result reached by the appraisal.
Consequently, the first step in any appraisal procedure is to have a clear understanding of the purposes for making the appraisal and the value to be sought. The adequacy and reliability of available data also are determining factors in the selection of the approaches to be employed. A lack of certain pertinent or up-to-date information may well eliminate an otherwise possible approach. When this is the case, it is not considered a departure from USPAP, since the approach was considered but not workable.
In other instances, proper procedures may only call for an appropriate discounting of conclusions drawn from such data. Thus, based on its adaptability to the specific problem, one method is subsequently the focus of the analysis and the other approach methods may not be employed. This is considered a limited appraisal and a departure from USPAP Standard 1.
In most appraisals, all three approach methods will ordinarily have something to contribute. Each approach method is used independently to reach an estimated value. Then, as a final step, by applying to each separate value a weight proportionate to its merits in that particular instance, conclusions are reached as to one appropriate value. This procedure is known as reconciliation.