What Is an Appraisal?

An appraisal, very simply, is an opinion of value, of a specific property, as of a certain date. Reliable appraisals, of course, are those opinions supported by facts, logical conclusions, experience, knowledge and expertise. There are three principal approaches to estimating value:

• Cost Approach
• Sales Comparison Approach
• Income Approach

One or all of these approaches may be pertinent to a particular valuation assignment depending upon the purpose of the appraisal, market conditions and the approaches to value taken by market participants.

Very briefly, the approaches can be described as:

The Cost Approach arrives at a value conclusion by assuming that a buyer will not pay more for a property that the cost of creating a comparable substitute.

It begins with an estimate of land value to which the depreciated value of the improvements is added. Improvement value is the cost to build a similar product in today’s market, less any accrued depreciation due to wear and tear, changes in styles, design, or utility (functional obsolescence), or changes affecting the property from outside its boundaries like general market conditions (external obsolescence).

The appraiser must be well informed regarding current costs as well as market preferences.

The Sales Comparison Approach estimates value by examining sales of other properties that are similar or “comparable” to the property being appraised. It is rare when two properties are identical, so the comparable sales are usually adjusted for differences in the selling date, terms of sale, physical characteristics of the structure, land value, etc.

Understanding what is truly “comparable” is one of the keys to this approach. Another key is determination of appropriate adjustments.

The Income Approach is usually applicable in the appraisal of income producing properties. It is not typically used in the appraisal of vacant land, single family houses or residential condominiums.