The three approaches to value, in plain English

An appraisal is only as useful as the reasoning behind it. Appraisers use three recognized approaches to value. Not every approach fits every property, but understanding all three helps you read a report and see why the final number holds up.

1. Sales comparison

We compare the property with similar properties that recently sold, then adjust for the differences. If a comparable home has an extra bathroom, a larger lot or a newer roof, we adjust its price to reflect what the subject property would have sold for in its place.

This is usually the most persuasive approach for homes, condominiums and vacant land, where there are enough recent sales to compare. The quality of the result depends on choosing good comparables and supporting each adjustment with market evidence, not rules of thumb.

2. Cost

We estimate what it would cost to replace the improvements today, subtract depreciation, and add the value of the land. Depreciation covers physical wear, outdated design and outside factors such as a change in the neighborhood.

The cost approach is most helpful for newer buildings, special-purpose property such as a church or a school, and agricultural improvements, where there may be few comparable sales. It is also a useful check on the other approaches.

3. Income

For income-producing property, we convert expected cash flow into value using market capitalization or discount rates. In simple terms: what would an informed investor pay today for the income this property is likely to produce?

This approach drives most commercial appraisals, from multi-family buildings to retail and office space. It depends on realistic rents, vacancy and expenses, which is why market rent studies are a service of their own.

Bringing them together

Once each approach that applies is complete, the appraiser reconciles them. This is not an average. It is a judgment about which approach is most reliable for this property and this intended use, explained in the report so that a lender, an attorney or a tax board can follow it.

If you have questions about a report you already have, or you need one that will hold up to scrutiny, we are glad to talk it through.

This article is general information, not an appraisal or legal advice for a specific property.