Appraisal — The Three Approaches to Value

An appraisal is a professional estimate of a property's market value.

1. Sales Comparison Approach (Market Data):

Most common for residential property

Compare subject property to similar recently sold properties (comparables/comps)

Adjust for differences (extra bedroom, larger lot, newer roof)

2. Cost Approach:

Land value + cost to rebuild improvements - depreciation

Best for new construction, special-use properties (churches, schools)

Three types of depreciation: physical deterioration, functional obsolescence, external/economic obsolescence

3. Income Approach (Capitalization):

Best for investment/income-producing properties

Net Operating Income (NOI) ÷ Capitalization Rate = Value

Example: NOI of $50,000 ÷ cap rate of 5% = $1,000,000

Key terms:

Market value — most probable price in arm's-length transaction

Assessed value — value set by tax assessor for property taxes

Appraised value — professional estimate for lending purposes

Reference:

Wikipedia: Real Estate Appraisal

https://en.wikipedia.org/wiki/Real_estate_appraisal