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Property Valuation and Appraisal

Determining what a property is worth is central to pricing listings, advising buyers, and securing financing. This chapter explains the three approaches to value, the principles that drive value, the types of depreciation, and the difference between an appraisal and a comparative market analysis. These concepts help licensees understand how value is estimated and supported.

Value, Price, and the Appraisal

An appraisal is a supported opinion of value as of a specific date, not a guarantee of price. Market value assumes a willing, informed buyer and seller acting without undue pressure and with reasonable market exposure. This standard differs from a forced or distressed sale price. Lenders rely on appraisals to ensure a loan is adequately secured.

Appraisal is an opinion
It is a professional estimate of value on a given date, not a promise of a future sale price.
Market value assumptions
Assumes a willing buyer and seller, neither under duress, with reasonable exposure to the market.
Value vs. price vs. cost
Price is what is paid, cost is what is spent to build, and value is worth in the market; they can differ.
Lender reliance
Lenders order appraisals to confirm the property supports the loan amount.

The Three Approaches to Value

Appraisers use three approaches to estimate value. The sales comparison approach analyzes recent sales of similar properties, adjusting the comparables to the subject. The cost approach adds land value to the depreciated cost of improvements. The income approach converts net operating income into value using a capitalization rate. The appraiser reconciles the applicable approaches into a final opinion.

Sales comparison approach
Compares recent sales of similar properties and adjusts the comparables, not the subject.
Cost approach
Land value plus the depreciated cost to rebuild; best for new or special-purpose properties.
Income approach
Value equals net operating income divided by the capitalization rate for income property.
Reconciliation
The appraiser weighs the approaches by reliability rather than simply averaging them.

Principles of Value

Several economic principles explain why properties are worth what they are. Substitution holds that a buyer will pay no more than the cost of an equally desirable alternative. Highest and best use identifies the most productive legal use. Conformity, regression, and progression describe how surrounding properties influence value. These principles guide appraisers in analyzing a market.

Substitution
A buyer will pay no more than the cost of an equally desirable substitute property.
Highest and best use
The use that is legally permissible, physically possible, financially feasible, and most productive.
Conformity
Value is maximized when a property is similar in style and use to its neighbors.
Regression and progression
A superior home is dragged down by lesser neighbors; a lesser home is lifted by superior ones.

Depreciation and Obsolescence

Depreciation is a loss in value from any cause and takes three forms. Physical deterioration results from wear, age, and the elements. Functional obsolescence comes from outdated design within the property. External or economic obsolescence stems from negative factors outside the property boundaries. Recognizing the type helps determine whether the loss is curable.

Physical deterioration
Loss from wear and tear, such as a worn roof or peeling paint; may be curable or incurable.
Functional obsolescence
Loss from outdated or poorly designed features, such as an awkward floor plan.
External obsolescence
Loss from off-site factors like a nearby nuisance; generally incurable by the owner.
Accrued depreciation
The total loss in value of improvements from all three causes since construction.

Appraisal Tools and the CMA

Licensees often prepare a comparative market analysis to help price a listing or an offer, but a CMA is not a certified appraisal. Investors may use the gross rent multiplier as a quick screening tool comparing price to rent. The capitalization rate reflects risk and return for income property. Knowing which tool applies keeps licensees within their role and the law.

Comparative market analysis
An informal pricing estimate using comparable sales; not a formal appraisal.
Gross rent multiplier
Sale price divided by gross rent; a fast screen that ignores operating expenses.
Capitalization rate
A higher cap rate signals more risk and a lower value for the same income.
Stay within role
Licensees must not present a CMA as a certified appraisal, which requires a licensed appraiser.
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Last updated: July 2026

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