Direct Sales Comparison Approach
In the direct sales comparison approach, the subject property is compared to similar properties that have recently sold and can be supported by real estate that is currently under contract for purchase. These properties are adjusted to the subject with regards to differences in location, condition, living area, features, etc.
A method for estimating supportable or appropriate adjustments is the pairing of data sets. This involves two or more comparables where variances are observed. Comparing the sales will give an indication of the market reaction to the variance. This type of analysis is usually on a recognized unit of comparison basis that is typical for the type of property being appraised. If sufficient market data does exist for an indicated range attributable to the variation, it can assist in estimating the appropriate adjustment. In some cases, due to a lack of information or a market with non-definable variations, subjective or intuitive adjustments are required.
Income Approach
The income approach to value is basically an analysis of anticipated future benefits converted to an estimated present value. This is done by estimating of potential gross income for the subject. If market data permits, a good indicator of rates for use in valuation would come from actual sales of property rented or leased at the time the transactions occurred. In some instances, the use of this approach is not warranted. This usually relates to property that is not readily rented or not used for typical investment purposes.
Cost Approach
The cost approach to value is as market oriented as the other two approaches. It involves comparable sales of land which are used in estimation of site value. Additionally, a cost new of the buildings and other improvements must be calculated. This is done by consultation with area contractors who specialize in the type of property being appraised or through a recognized cost service manual.
After the cost new has been estimated, depreciation from all sources must be approximated. Depreciation is a measure of the loss of in value inherent in the property. Depreciation falls under three major headings; 1. Physical, actual wear and tear on the structure and its components. 2. Functional obsolescence, which is an impairment of functional capacity or efficiency, inadequacy, or the inability of the improvement to perform adequately. 3. External, which is a loss in value due to factors external from the property. This can include economic situations, factor regarding location or even environmental forces.
The cost approach is best utilized in new or reasonably new structures. The inherent liability in utilization of this approach to value is the estimation of actual depreciation from all causes. As a property ages, this approach will have lessening validity as an indicator of worth.
Correlation
All preliminary value estimates, as indicated by any of the three separate approaches, are correlated into a final estimate of the property's worth. In the final correlation, the relative significance of each approach is weighed as it pertains to the type of property being appraised. After the most supportable approach and or approaches is determined, factors are weighed appropriately and an estimate of the value formed.
