What is an appraisal?
Simply stated, an appraisal is the act or process of developing an opinion of value, typically utilizing three approaches (as appropriate) to generate value indications: the cost approach, the sales comparison approach and the income capitalization approach.
Cost Approach
Cost Approach
The cost approach to value is one of three approaches traditionally utilized in the appraisal process. The indication of value derived from this approach is based on an estimation of the value of the land to which is added the cost of improvements, less any accrued depreciation, plus entrepreneurial incentive.
Sales Comparison Approach
Sales Comparison Approach
This approach to value is based on the principle of substitution which, paraphrasing the Real Estate Appraisal Terminology text, holds that a prudent purchaser will pay no more for real property than the cost of acquiring an equally desirable substitute on the open market. This principle presumes that the buyer will consider the various alternatives available, will act rationally on the basis of this information obtained, and that time is not of the essence.
Income Capitalization Approach
Income Capitalization Approach
The income capitalization approach undertakes an analysis of the subject property from an economic point of view, specifically as to its ability to provide a net income in terms of dollars. Following this determination, the estimated net income figure is capitalized at a rate commensurate with other rates of return available to investors in the marketplace. The capitalized income figure thus obtained represents the indicated value of the property via the income capitalization approach.
Reconciliation
The final phase of the valuation process in which two or more value indications derived from market data are resolved into a final value opinion.
The final phase of the valuation process in which two or more value indications derived from market data are resolved into a final value opinion.