Valuation Methodology and Analysis
The three approaches
Reviewers must be able to test whether each approach was applied correctly and reconciled sensibly.
Sales comparison - verify comparability, transaction status, and adjustment support. Watch for net/gross adjustment magnitude, inconsistent direction of adjustments, and unadjusted outliers.
Income - test the derivation of income, vacancy, expenses, and the capitalization or discount rate. Confirm the rate's source and consistency with the income stream (e.g., a rate built from comparable sales must reflect comparable risk).
Cost - test land value, replacement versus reproduction cost, and accrued depreciation, including physical, functional, and external obsolescence.
Reconciliation
Reconciliation is not averaging. It is a reasoned judgment about which approach and indicators best reflect the market, given the property type and data quality. Reviewers should ask whether the appraiser's stated rationale matches the weighting actually applied.
Traps
- Accepting adjustments that are internally inconsistent (e.g., a superior feature adjusted upward).
- Failing to test whether the capitalization rate matches the comparable-derived rate.
- Missing double-counting of obsolescence in the cost approach.
- Treating reconciliation as arithmetic rather than analysis.
Rule of thumb
For any adjustment or rate, ask: What is the source, and does it reconcile to the market evidence? An unsupported adjustment is a credibility problem even if it looks reasonable.
Worked example
An income approach applies a 6.0% cap rate while the appraiser's own comparable sales imply 7.2%. If the report gives no market support for the lower rate, the reviewer should flag the inconsistency and its effect on the value conclusion, rather than simply recomputing.