The appraiser has three accepted methods for estimating value. These are the Cost, Sales Comparison and Income Approaches.

Cost Approach

The Cost Approach is very reliable for newer structures that have had little physical depreciation. The first step in the cost approach is to estimate the value of the land as if vacant and ready to be put to its highest and best use. The next step is to estimate the cost to replace the improvements and next to estimate the depreciation that has accrued on the improvements since they were built. Depreciation can be physical, functional environmental or external. Physical depreciation is basically physical wear and tear due to age. Functional depreciation is due to a lack of functionality of the improvements, for example 12 foot ceilings in a very cold climate would cost more to build but the typical buyer would pay less for due to the increased heating costs. After calculating the cost new less depreciation the as is value of the site improvements ie. water source, septic or sewer, grading, landscaping etc. are added to the site value and the depreciated improvement cost to arrive at an indicated value.

Sales Comparison Approach

The Sales Comparison Approach is typically the most reliable approach for properties where there are sufficient similar properties that have sold to make valid comparisons between the property being appraised and the sales. The appraiser collects many pertinent facts while inspecting the properties and makes adjustments for differences between the subject property and the sales. For example two houses are nearly identical except that one has a fireplace and sold for $5,000 more than the other. This would indicate that a fireplace adds $5,000 to a property. If a property is being compared to another property and one has a fireplace and the other does not, then an adjustment of $5,000 must be made. This process continues with all pertinent facts such as square feet of living area, number of bathrooms, foundation type, age etc. After calculating all adjustments each comparable sale will indicate a value estimate for the subject property. The appraiser must then reconcile the indicated values based on which sales are the most comparable to arrive at a final estimate of value.

Income Approach

The Income Approach to value is typically used on property types that are commonly rented. The Income Approach looks at a property from an investors perspective and analyzes the relationship between what a property can earn an investor and how much that property will sell for.

In Summation


Not all approaches are applicable all the time. The appraiser must decide which approaches are applicable and then develop them. The income approach for example is not typically utilized for single family residences in an area where single family properties are not normally rented as this approach would be meaningless without sufficient data to support it. Likewise the cost approach looses relevance as a property ages as estimating depreciation becomes more difficult. All three approaches must be considered for every appraisal assignment and applied as applicable.