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Three approaches to value..
The three normally accepted approaches to valuation include the sales comparison, cost and income techniques. Although each method is important, every appraisal may not contain all three approahes.
The sales comparison is generally applicable in the valuation of all real property and is premised on the principle of substitution; it assumes the market will pay an equal price for a substitute property with comparable characteristics.
Through use of the sales comparison approach the appraiser attempts to replicate the actions of buyers and sellers in the market place as they compare and rank properties. Knowledge of the local market and experience allows the appraiser to select appropriate properties, analyze the sales and make adjustments for variations such as location, the size and condition of the improvements, zoning, and functional utility.
The income approach is used in the analysis of most commercial and income producing properties. The appraiser examines the income and expenses associated with a property, vacancy and rent levels, and creates a proforma. Income producing properties generate a cash flow that can be converted into an indication of value through use of direct capitalization or discounted cash flow analysis.
The cost approach examines what it would cost to replace or replicate the subject property. This technique is most meaningful when the improvements are newer and they represent the highest and best use of the property. The appraiser considers the cost to build, less any loss in value due to physical depreciation or obsolescence, and this is added to the value of the underlying land. Terms such as accrued depreciation, functional obsolescence, economic life and effective age are associated with the cost approach.
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