Property Valuation and Appraisal
Types of value and governing principles
Candidates must distinguish market value, assessed value, insurable value, use value, investment value, and liquidation value. Key valuation principles include highest and best use, substitution, contribution, conformity, anticipation, progression and regression, competition, and plottage or assemblage.
The three approaches
Sales comparison adjusts comparable sales to the subject: if the comparable is superior, subtract; if inferior, add. The trap is adjusting the subject to the comparables, which reverses every adjustment. The cost approach estimates land value plus current construction cost (replacement or reproduction), minus accrued depreciation from physical deterioration, functional obsolescence, and external obsolescence; depreciation appears only in this approach. The income approach capitalizes net operating income: value equals income divided by the capitalization rate. A higher cap rate produces a lower value, and the cap rate must be derived from comparable sales, not from the subject.
Multipliers and practice limits
A gross rent multiplier equals price divided by gross monthly rent and is used for quick comparisons of similar income properties. A comparative market analysis prepared by a licensee is not an appraisal. In Alabama, appraisal practice is regulated by the Alabama Real Estate Appraisers Board, and federally related transactions require a state-credentialed appraiser. Reconciliation is the final step: the appraiser weighs the approaches by relevance and data reliability rather than averaging them mechanically.
Worked example
A duplex produces a net operating income of 24,000 dollars and comparable sales indicate an 8 percent cap rate. Value equals 24,000 divided by 0.08, or 300,000 dollars. If the cap rate rises to 10 percent, the same income supports only 240,000 dollars.