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.
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.
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.
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 Functional obsolescence comes from outdated design within the property.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.
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.
Last updated: July 2026