Depending on the property and the purpose of the appraisal, an appraiser may consider three primary approaches to value:
Sales Comparison Approach
This approach compares the property to similar properties that have recently sold. Differences in location, size, condition, property characteristics, and market conditions are analyzed to develop an indication of value.
Income Capitalization Approach
Commonly used for income-producing properties, this approach considers the property’s ability to generate income. Factors such as rental rates, vacancy, operating expenses, and capitalization rates may be analyzed to determine value.
Cost Approach
This approach considers the value of the land plus the cost to construct the improvements, less applicable depreciation. It can be particularly useful for newer or special-purpose properties.
Not every approach is equally applicable to every property. The appraiser determines which methods provide the most relevant and reliable indications of value based on the property and available market data.
Understanding each approach helps tell a more complete story of a property’s value.
