Value and Appraisal
This chapter introduces how value is defined and estimated, the economic principles that drive value, and the three approaches appraisers use to arrive at an opinion of value. Value analysis underlies pricing, lending, and investment decisions.
Value and Its Principles
Market value is the most probable price a property should bring in a competitive market with a willing, informed buyer and seller and no undue pressure. Several economic principles influence value: substitution holds that a buyer will pay no more than the cost of an equally desirable alternative; supply and demand set price levels; and conformity says values are maximized when properties are reasonably similar. Anticipation reflects the value of expected future benefits, while contribution measures how much a feature adds to overall value.
The Three Approaches to Value
The sales comparison approach estimates value by adjusting the sale prices of similar recently sold properties and is the primary method for single-family homes. The cost approach adds the depreciated value of improvements to the land value and works best for new or special-purpose buildings. The income capitalization approach converts a property's net operating income into value and is used for income-producing property. An appraiser reconciles the approaches to reach a final opinion rather than simply averaging them.
Depreciation and Highest and Best Use
Depreciation is a loss in value from any cause and takes three forms: physical deterioration, functional obsolescence from outdated design, and external obsolescence from negative influences outside the property. Highest and best use is the legally permissible, physically possible, financially feasible, and maximally productive use of a site. Appraisers must analyze highest and best use before applying the approaches to value. Recognizing these concepts helps explain why two similar buildings can have very different values.