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An accurate appraisal depends on the methodical collection of data. Specific data, covering details regarding the particular property, and general data, pertaining to the nation, region, city and neighborhood wherein the property is located, are collected and analyzed to arrive at a value. Three basic approaches are used during this process to determine a property’s value.
Method 1 — Sales Comparison Approach
The sales comparison approach is commonly used in valuing single-family homes and land. Sometimes called the market data approach, it is an estimate of value derived by comparing a property with recently sold properties with similar characteristics. These similar properties are referred to as comparables, and in order to provide a valid comparison, each must:
- Be as similar to the subject property as possible;
- Have been sold within the last year in an open and competitive market and
- Have been sold under typical market conditions..
Method 2 — Cost Approach
The cost approach can be used to estimate the value of properties that have been improved by one or more buildings. This method involves separate estimates of value for the building(s) and the land, taking into consideration depreciation. The estimates are added together to calculate the value of the entire improved property. The cost approach makes the assumption that a reasonable buyer would not pay more for an existing improved property than it would cost to buy a comparable lot and construct a building that is comparable in terms of desirability and usefulness. This approach is useful when the property being appraised is a type of property that is not frequently sold and is not an income-producing property. Examples include schools, churches, hospitals and government buildings.
- Method 3 — Income Capitalization Approach
The income approach is the third method of real estate valuation, and is based on the relationship between the rate of return an investor requires and the net income that a property produces. It is used to estimate the value of income-producing properties such as apartment complexes, office buildings and shopping centers. Appraisals using the income capitalization approach can be fairly straightforward when the subject property can be expected to have a future income, and when its expenses are predictable and steady.