Appraising the Property

How will my property be appraised?

Appraisers generally use three methods of appraisal to estimate the value of real estate: the market approach, the cost approach and the income approach. 

Which one will they use to appraise my property? 

Appraisers generally prefer to use as many of the three approaches as they deem appropriate. It is not unusual, for example, for an appraiser to use all three approaches when valuing an office building. 

Appraisers may chose not to apply one or more of the three approaches if they feel application of a given approach would be inappropriate, given the particular approach or the particular property. Since the cost approach considers the cost of reconstructing buildings on the property, the cost approach is obviously not used to estimate the value of vacant property. Since the income approach is based upon the amount of rent an owner would receive for the property, the income approach is seldom used to value properties not typically rented. 

How does the market approach work? 

Under the market approach, appraisers search for properties they feel are comparable to your property. They then use the sale prices of those properties to arrive at an estimate of value for your property.

Since no two properties are exactly alike and since some of the dissimilarities between the appraiser’s "comparable" properties and your property may be significant, the appraiser makes adjustments to the sales prices of the comparable properties before using the prices to arrive at an estimate of value for your property. These adjustments may be positive or negative, depending on whether the comparable property is viewed by the appraiser as having superior or inferior characteristics when compared to your property. If the adjustment is positive, the appraiser will increase the price of the comparable property before he compares that price to your property. If the adjustment is negative, the appraiser will decrease the price of the comparable property when using it to appraise your property.

I just bought my property recently. Will the appraisers use the price which I paid for the property recently in appraising its value today?

Probably. In general, appraisers consider the purchase of the subject property as the most comparable sale available. If, however, the property itself or market conditions have changed dramatically between the date of purchase and the date of condemnation, the appraiser may choose not to use the sale of the subject property in preparing the appraisal. 

How does the cost approach work? 

Under the cost approach, the appraiser first estimates the value of the land, as if the land were vacant. He then estimates how much it would cost to rebuild, at today’s prices, all of the improvements on the property. He then estimates the amount by which the improvements have depreciated and subtracts the depreciation from the cost of reconstruction new. He then adds the depreciated cost of reconstructing the improvements to the land value to arrive at a total estimate. 

How does the income approach work? 

First the appraiser estimates how much your property would rent for on the open market. He does this by finding rental rates of comparable properties and based on the research, he arrives at an estimate for annual gross income. He then estimates an amount for vacancy and collection and subtracts that amount from gross income to arrive at an estimate of adjusted gross income. The appraiser then estimates the annual expenses which would be paid by an owner of your type of property and subtracts the total amount of those expenses to arrive at an estimate of annual net income. Finally, the appraiser converts his estimate of annual net income to value by dividing his estimate of annual net income by a capitalization rate.

What are the types of expenses appraisers usually consider when arriving at annual net income? 

Maintenance, management, taxes and insurance.

Of the three approaches to value – market, cost and income – which approach will lead to the highest value for my property? 

The answer to this question depends upon your property, your appraiser and the real estate data used in the appraisal. More often then not, however, the estimates arrived at by all three approaches are very similar. 

Why are some appraisal estimates so different from others for the same property? 

An appraisal is a subjective opinion of value.  The appraiser's understanding of the facts, his or her factual assumptions, and his or her understanding of eminent domain law may all operate to affect dramatically the final dollar amount of value estimate.