What are Appraisal Methods ?
Appraisers use three common approaches when establishing
the value of a given property:
- Cost Approach: In this approach
the following formula is used to arrive at the property
value: Value of the land (vacant), added to the cost
to reconstruct the appraised building as new on the
date of value, less accrued depreciation the building
suffers in comparison with a new building.
- Sales Comparison Approach: In
this approach the appraiser identifies 3-4 comparable
properties in the neighborhood which have recently
been sold. Ideally, the properties are close in vicinity
(within a 1/2 mile radius of the subject property)
and have sold within the last six months. The appraiser
then compares the sold properties to the subject property.
The factors used in the comparison include square
footage, number of bedrooms and bathrooms, property
age, lot size, view, and property condition.
- Income Approach: In this approach
the potential net income of the property is capitalized
to arrive at a property value. This approach is suited
to income-producing properties and is usually used
in conjunction with other valuation methods. The process
of converting a future income stream into a present
value is known as capitalization.
After thorough exercise of the three approaches, a
final estimate or opinion of value is correlated. When
evaluating single-family, owner-occupied properties,
the sales comparison approach is most heavily weighted
by an appraiser.
