What is an Appraisal?
In the simplest terms, an appraisal is an opinion of value. An appraisal is based on a systematic process that includes gathering and analyzing all necessary information, applying the approaches to value and reconciling all of that analysis and data into the opinion of value.
In arriving at a value opinion, an appraiser will consider several methods of appraisal application that approach the concept of property value from different perspectives. These methods are referred to as the "approaches to value" and are the cost approach, market approach and income approach.
1. Cost Approach
The Cost Approach method to valuing property combines an estimate of land value with an estimate of depreciated reproduction or replacement cost of the improvements. The basis of this method is the Principle of Substitution, through which the value of a property is calculated by factoring the cost of acquiring a separate property, but of similar function and design.
2. Market Approach
The Market Approach to valuing property involves a process of comparing market data, e.g. property sale prices, asking prices and offers from prospective buyers. A comparison grid assists in adjusting comparable sales for differences from the subject property. Some examples are location, building size, lot size, condition, construction quality, number of bathrooms, fireplaces, etc.
3. Income Approach
The Income Approach to valuing property utilizes an estimate of net income derived from the operation of said property, then selecting a capitalization rate from market indications of similar properties to convert that income to an estimate of present worth. The basis of this method is the Principle of Anticipation, which affirms that value is created by the expectation of financial benefits to be derived from the possession, operation and/or capital gain from selling a property.