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The sales comparison approach is the most used and accepted method to determine the opinion of value. This approach compares similar properties (also known as “comps”) within the subject’s neighborhood or competing neighborhoods. An analysis of the differences in features is completed to determine if adjustments are warranted for items like time, living area, lot size, view, location, amenities, etc. A property characteristic that may be highly valued in one neighborhood may not be valued to the same degree in another area. This is where market-derived data is used to support the value.
The cost approach is used to determine the cost of rebuilding a similar structure or replacing the existing home with the same materials. The terms used are “replacement cost” and “reproduction cost.” The formula used is the cost of building the existing home, minus the depreciation, equals the current home’s value. Older homes are harder to accurately determine the accrued depreciation, which typically makes for less reliable results in terms of value. Therefore, this method is generally used as a secondary approach in valuing new construction and recently built homes.
The income approach is typically used for commercial or income producing residential properties. It’s used to analyze the revenue a property brings in and comparable property rents in the area to determine the estimated opinion of value.
The appraiser may use one or all three methods in valuing a home. Once the appropriate methods have been determined for the appraisal, the appraiser reconciles the range of values to an estimated opinion of value. While this value is a strong indicator of what the house may sell for, it is quite possible the sale price could be higher or lower. There are additional factors such as seller/buyer motivation, demand, and emotion that may have an affect value.
Certified Residential Appraiser | MCB Valuation
License # 3002950
