What are Appraisal Methods?
There are 3 common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all 3, a final value estimate is developed. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.
Cost Approach – A formula is used to obtain the property value: Land value (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 – The Appraiser identifies 3 to 4 comparable, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property. The appraiser will then take the sale price and add/subtract a standard dollar amount for each comparable depending on how it compares for square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition. In this way, the appraiser arrives at a comparable value for each property, and will finally use the value for the property most like the one being appraised.
Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.