Value and Appraisal
Estimating value accurately supports pricing, lending, and investment decisions. This chapter covers the principles that create value, the three approaches appraisers use, and the concept of depreciation, helping licensees understand how a supportable opinion of value is developed.
Principles and Types of Value
Market value is the most probable price a property should bring in a competitive, open market with a willing buyer and seller, neither under pressure. Value is influenced by principles such as supply and demand, substitution (a buyer pays no more than the cost of an equally desirable substitute), highest and best use, and conformity. The four elements of value are demand, utility, scarcity, and transferability, sometimes remembered as DUST.
The Three Approaches to Value
The sales comparison approach adjusts recent sales of similar properties and is most reliable for residential resale homes. The cost approach estimates the cost to replace improvements, subtracts depreciation, and adds land value; it fits new or special-purpose buildings. The income approach converts a property's net operating income into value using a capitalization rate and is used for investment property. An appraiser reconciles the approaches into a final opinion.
Depreciation
Depreciation is a loss in value from any cause and takes three forms. Physical deterioration is ordinary wear and tear or damage. Functional obsolescence results from outdated design or features within the property, such as a poor floor plan. External or economic obsolescence comes from negative influences outside the property, like a nearby nuisance or a declining neighborhood, and is generally incurable because the owner cannot control it.