Comparative Approach
Takes current selling prices of properties similar to the appraised property and adjusts those prices for any differences
The market approach to value is based on the principle of substitution
How to Adjust a Comparable Sale (Comps)
1. Subtract the value of any improvements found in the comparable houses but not in the house to be appraised.
2. Add the value of any improvements found in the appraisal (subject) house but not found in the comparable houses.
3. Adjust also for differenc
Advantages of The Market Approach
1. It is easy to learn and, with a little experience, easy to apply.
2. Required information is usually readily available since there are generally many recent comparable sales.
3. This is the most effective appraisal approach for home and condominium sal
Disadvantages of The Market Approach
1. This method requires many recent comparable sales of similar properties.
2. This method is least reliable when there are rapid economic changes.
3. The market data method is less valid with certain income properties because a separate analysis of the i
COST APPROACH (REPLACEMENT COST METHOD)
The process of appraising a property by calculating the cost of the land and buildings as if they were new today, and then subtracting the accrued depreciation in order to arrive at the current value.
This is the method chosen by appraisers to value uniqu
Direct Costs
Expenditures for labor and materials used in the construction of the improvement(s). A contractor's overhead and profit are generally treated as direct costs.
Indirect Costs
Expenditures other than material and labor costs. Examples are administrative costs, professional fees, financing costs, insurance, and taxes.
Steps in the Cost Approach
1. Appraise the Land Separately - estimate the value of the vacant land using the market comparison approach.
2. Estimate Replacement Cost
3. Estimate and Deduct Depreciation
Replacement Methods
1. Comparative-Unit Method = based on the cost per square foot to replace. Least accurate method
2. Unit-In-Place Method = Values the cost of each component in the structure, floors, foundation, walls,
Parking lot, etc. individually and then total to find
Depreciation
Reduction in the value of property due to any cause. Three types:
1. Physical Deterioration (Curable or Incurable) - the loss in value by wear and tear.
2. Functional Obsolescence (Curable or Incurable) - is the loss in value due to outmoded style or non-
Advantages of The Cost Approach
1. New buildings. Quite accurate for new housing developments and some prefer it to comps.
2. Unique structures. Train station, hospitals, a house of religious worship, concert halls and elegant theaters.
3. Public buildings. Courthouses, colleges, school
Disadvantages of The Cost Approach
1. There must be an accurate value of the site (land). This is done by obtaining comparable sales of land or if that is not possible, subtracting the improvements on an improved parcel to arrive at the land value.
2. Since determining depreciation is more
CAPITALIZATION APPROACH (INCOME APPROACH)
The process of analyzing the future net income from a property to determine its current
market value. The income approach to value is based on the premise that a property is worth the present value of the future income to be produced by the property.
Steps in the Income Approach
1. Calculate the Annual Gross Income
2.Complete an Operating Expense Statement and deduct the total from the Annual Gross Income. = Net Operating Income
3.Divide Net Operating Income by the chosen Capitalization Rate = Value of the Property at that Capita
Gross Rent Multiplier
A "rule of thumb" for converting rental income into market value
Sales Price / Annual Rent =300,000/24,000=12.5 Gross Rent Multiplier
Cap Rate
The higher the Capitalization Rate, the lower the value. Hence, the selection of the correct capitalization rate is critical. Otherwise a great distortion in value could result. Appraisers usually closely value other similar properties in the neighborhood
FINAL RECONCILIATION
The appraiser will utilizes all three approaches when appraising a property, although he will allocate more weight to the appropriate approach for that property, The appraiser will then reconcile all three approached to arrive at a Final Opinion of Value.