Applications of the Approaches to Value and Reconciliation
The three approaches
Sales comparison estimates value from recent, arm's-length sales, adjusting comparables toward the subject for elements such as market conditions, location, and physical characteristics. Apply adjustments in a consistent sequence and check direction: if the comparable is superior, its price is adjusted downward. The cost approach adds land value to depreciated improvement cost. Depreciation includes physical deterioration, functional obsolescence, and external obsolescence; land is never depreciated. The income approach capitalizes net operating income or applies a gross rent multiplier. GRM uses gross rent, while direct capitalization uses NOI.
Traps
Common errors include deducting depreciation from land, using contract rent when market rent is required, multiplying income by a cap rate instead of dividing, and averaging approaches rather than reconciling them. Reconciliation is a reasoned weighting based on relevance and reliability, not a mechanical average.
Worked example
A comparable sells for $400,000 with adjustments of +$10,000 for location, -$15,000 for condition, and +$5,000 for market conditions. Net adjustment is $0, indicating $400,000. If the subject is superior in condition, the comparable is adjusted upward; confirm the sign before totaling.