THEORY
OF APPRAISAL
Definition
of Appraisal:
An estimate of opinion of value -
A conclusion resulting from the analysis of fact
There
are three methods that are used to arrive at an appraised value
of real estate. Not all methods are suitable for determining
the probable value of a given property. The methods are as follows.
Cost
Approach
The value estimate of a property is derived by estimating the
replacement cost of the improvements, deducting wherefrom the
estimated accrued depreciation, then adding the market value
of the land.
The drawback to this method of determining value is that it
does not take into consideration; location, functionality of
floor plan, nor marketing conditions.
Income
Approach
The estimated gross income of the subject property is used as
the basis for estimating value.
This method is not suitable because the rental market does not
necessarily tie into the marketing of resale property. The availability
of rental property and the supply and demand factor of renters
determines what an investor will be willing to pay for a given
property.
Market
Data or Comparison Approach
The most suitable method for determining value of most property.
The subject property is compared with similar properties in
the same or a comparable area which have recently sold. Values
are added or subtracted depending upon what the subject property
offers in comparison to the sold properties.
This is the most effective method of determining value as all
factors can be realistically considered, including marketing
conditions, location, functionality of floor plans, etc.
