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.
