Valuation and Appraisal Methods
Value is an opinion supported by evidence, not a fixed fact, and brokers use valuation principles when advising clients on price. The three classic approaches to value each fit different property types and market situations.
Principles That Drive Value
The principle of substitution holds that a buyer will pay no more for a property than for an equally desirable substitute, which underlies the sales comparison approach. Supply and demand, highest and best use, and the principles of contribution and conformity also shape market value. Value is distinct from price, which is what a property actually sold for, and from cost, which is what it took to build. Recognizing these differences keeps brokers from confusing a seller's cost with what the market will pay.
The Three Approaches to Value
The sales comparison approach adjusts recently sold comparables to the subject and is weighted most heavily for owner-occupied homes. The cost approach estimates the cost to replace improvements less depreciation, plus land value, and suits new or special-purpose buildings. The income approach converts a property's expected net operating income into value using a capitalization rate and fits rental and investment property. An appraiser reconciles the approaches rather than simply averaging them, giving the most weight to the most reliable method for that property.