The three approaches to value, in plain English

When appraisers talk about "approaches to value", they mean three different ways of looking at the same property. Each one answers a slightly different question. Used together, they help build a number that holds up when someone questions it.

1. The sales comparison approach

The question here is simple: what have similar properties sold for recently? We find sales of properties that are as close as possible to yours in location, size, age, quality and use. Then we adjust for the differences. If a comparable home has an extra garage stall, its sale price is adjusted down to reflect what your property would have sold for without it.

This approach carries the most weight for most homes, condominiums and vacant land, because buyers in those markets think in exactly this way. It works best when there are enough recent, truly similar sales. In a small rural market, or for an unusual property, good comparables can be hard to find, and the other approaches become more important.

2. The cost approach

The question here is: what would it cost to build this today? We estimate the cost to replace the improvements, subtract depreciation for age, wear and any outdated features, and then add the value of the land.

The cost approach is most useful for newer buildings and for special purpose properties that rarely sell, such as churches or some agricultural improvements. It is less reliable for older buildings, because estimating depreciation over many decades involves more judgment.

3. The income approach

The question here is: what is the income stream worth to an investor? For income-producing property such as apartments, retail, office or industrial buildings, we estimate the property's expected cash flow and convert it into a value. We do this with a market capitalization rate or a discount rate drawn from how investors are pricing similar properties.

Getting the income right is the heart of this approach. That means realistic market rent, vacancy and operating expenses, not only the figures from the current lease. It is why market rent studies are a service of their own.

Bringing them together

Not every approach applies to every property, and the report explains why an approach was used or left out. When more than one approach is used, the appraiser does not simply average the results. Each approach is weighed by how reliable its data is for that property and that purpose. This final step is called reconciliation.

A clear reconciliation is one of the best signs of a good report. It tells the reader which evidence mattered most and why.

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