Common Methods Used in Property Appraisal

June 16, 2024

Real estate appraisals are critical in determining the value of a property, whether for buying, selling, refinancing, or tax purposes. Appraisers use several methodologies to establish a property's market value, each suited to different types of properties and scenarios. This article explores the three primary methods: the Sales Comparison Approach, the Cost Approach, and the Income Approach. These methods are commonly used by appraisal companies, one of which is Artisan Appraisals, who has graciously written this article to discuss each method and its use.

1. Sales Comparison Approach

The Sales Comparison Approach is perhaps the most commonly used method for residential properties. This approach involves comparing the subject property with similar properties that have recently sold in the same area, known as comparables or "comps."

Key Elements:

  • Selection of Comparables: Appraisers select properties that are similar in size, location, condition, and amenities.
  • Adjustment Process: Adjustments are made for differences between the subject property and the comparables. For instance, if the subject property has a swimming pool and a comparable does not, the value of the pool is added to the comparable's sale price.
  • Market Trends: Current market trends and conditions are considered to ensure the comparison reflects the present market.

When It's Appropriate:

  • Residential Properties: Best suited for single-family homes, condos, and townhouses.
  • Active Markets: Most effective in areas with a robust, active real estate market where there are numerous recent sales.
  • Divorce Appraisals: We find that the Sales Comparison Approach is used most often in divorce situations. This approach provides a straightforward way to compare similar properties without the emotional aspect of a divorce situation.

2. Cost Approach

The Cost Approach estimates the value of a property by determining how much it would cost to replace or reproduce the building, minus depreciation, plus the value of the land.

Key Elements:

  • Replacement/Reproduction Cost: Calculation of the current cost to build a similar structure.
  • Depreciation: Subtraction of depreciation due to physical wear and tear, functional obsolescence, or external factors.
  • Land Value: Addition of the land's market value as if it were vacant.

When It's Appropriate:

  • New Constructions: Ideal for new or relatively new buildings where the cost of construction is easy to estimate.
  • Unique Properties: Used for properties that do not have many comparables, such as custom-built homes or special-purpose buildings like schools or churches.

3. Income Approach

The Income Approach, also known as the Income Capitalization Approach, is commonly used for commercial properties and rental income-generating real estate. This method evaluates the property based on its ability to generate future income.

Key Elements:

  • Net Operating Income (NOI): Calculation of the property's gross income minus operating expenses.
  • Capitalization Rate (Cap Rate): A rate of return used to convert the NOI into a present value.
  • Market Rent: Consideration of the prevailing market rent rates for similar properties.

When It's Appropriate:

  • Commercial Properties: Best suited for office buildings, shopping centers, and apartment complexes.
  • Investment Properties: Used for properties primarily purchased for their income-generating potential.

Each of these appraisal methods provides a different perspective on property valuation, and the choice of method depends largely on the type of property and the purpose of the appraisal. The Sales Comparison Approach is widely used for residential properties due to the availability of comparable sales data and is most commonly used by divorce appraisers. The Cost Approach is favored for new or unique properties where construction costs are a primary factor. The Income Approach is essential for commercial and investment properties where income generation is the key value driver. By understanding these methods, property owners, buyers, and investors can better navigate the complexities of real estate valuation and make more informed decisions.


Jenevieve Moulin

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