Three Approaches to Appraisal Value
There are three common methods of determining appraisal value. Home appraisals
incorporate established techniques and methods to arrive at consistent and reliable
valuations. Appraising relies on these three approaches to determining value for any given
piece of property: sales comparison approach, income approach, and the cost approach.
These methods vary based on the type of property you are purchasing.
Sales Comparison Approach
The sales comparison appraisal approach is used for standard, single-family homes, and is
the most commonly relied up and sought after in the residential lending industry. This
approach looks at the sales of other similar properties. They are compared/contrasted, and
based on their similarities and differences, an appropriate value is derived. This method
ensures a fair value is determined for the home within the market and aids banks in their
lending decisions by providing them with an unbiased opinion of fair market value for the
collateral backing a given mortgage loan. This approach is also often used by realtors and
homeowners in determining list price for a property going up for sale.
The income approach is implemented primarily to evaluate properties that have income
potential, such as rental apartment buildings, office buildings, or shopping centers, but is
also used in residential real estate when a property is going to be tenant occupied. The
theory behind this method of appraisal value is that a property’s value is a function of it’s
potential to bring income. Properties can command a specific amount in rent and will also
have certain expenses which will need to be taken into consideration.
A residential real estate appraiser will often use the Gross Rent Multiplier or GRM for
estimating value. GRM uses the gross rentals of a property. This calculation can be done in
one of two ways using either gross potential income or gross operating income. The value
estimate is better using the gross operating income because losses for occupancy and non-
payment are taken into consideration.
The cost approach is the easiest but least used method of appraisal value. This method is
typically used for commercial property that will not be used as an income property, or larger
properties that have to be built from the ground up or drastically remodeled.
The land and property are assessed separately in the cost appraisal approach, in order to get
an understanding of what the overall value would be. The depreciation that could take place
over time is then taken into consideration and subtracted from the value amount. Lastly,
similar existing buildings will also be assessed to ensure the value is on par in comparison to
For residential real estate appraisals, one, two, or all three approaches to value may be
employed and your appraiser should reconcile the methods employed before determining
their final value opinion.
There are many reasons to receive an appraisal from Definitive Valuations to include:
- Determining list price for the sale of your home
- Getting an unbiased opinion to confirm value for a cash sale
- Reduce property tax obligations when a property is valued too high by your taxing authority
- Valuation needed to deal with an estate
- Determine honest property value for other financial or litigation needs
No matter the reason, Definitive Valuations is here to help. Contact us today!
Definitive Valuations is North Alabama’s premiere appraisal firm. Our mission is to provide
superior valuation and consulting services in Huntsville, Alabama, and surrounding areas.
Our staff strives to understand your needs and to provide the best solution for your
situation – whether for financial planning, relocation, tax dispute, legal matters, pre-listing,
or any other purposes. Discover more here.