The research and study of real estate value includes many factors, most of which fall under four categories: utility, scarcity, desirability, and effective purchasing power of potential buyers [1]. The appraiser must consider each factor which falls within these categories as they relate to recent sales and competing properties within a specific market area.
Methods of valuation include the sales comparison approach, income capitalization approach, and the cost approach. Each approach has its own inherent applicability relating to different property types. Some properties may require the application of only one or two approaches to value while others may require all three. An example of this would be a 35 year old multi-unit office building which has the potential to be purchased for partial owner occupancy or alternatively, an investor who would acquire the property for its income potential. Both the sales comparison approach and income approach to value would be applicable in this scenario. A one unit office building located in a rural area would most likely be purchased for owner occupancy. Therefore the sales comparison approach would provide the most reliable value indication for this property type.
The cost approach is helpful in determining the value of a property if a potential buyer would be likely to consider constructing a building which provides equal utility as an alternative to purchasing the property being appraised. For this reason, the cost approach to value is more relevant when the subject property has limited physical depreciation, and development land is readily available.
[1] Appraisal institute: appraisal of real estate. 13th edition. Chicago, IL : 2008
There are an abundance of resources available which can be utilized for valuation purposes. I have included a few links on the Resources section of my website which serves as an example.
Champlain Valley Appraisal Services, PLLC
Brett Kent Schermerhorn, Certified General Real Estate Appraiser
Phone: 802-881-0622
Valuation Methods
