Real Estate Appraisal and Valuation
Market value assumes a willing buyer and seller, both informed and unpressured, with reasonable exposure time. Contrast it with assessed value, insurable value, book value, liquidation value, and investment value.
Principles
Substitution drives the sales comparison and cost approaches. Highest and best use is the use that is legally permissible, physically possible, financially feasible, and maximally productive. Also know conformity, progression and regression, contribution, anticipation, balance, change, and externalities.
Approaches
- Sales comparison: adjust comparables toward the subject. If the comparable is superior, subtract; if inferior, add.
- Cost: land value plus replacement or reproduction cost minus depreciation (physical deterioration, functional obsolescence, external obsolescence).
- Income: value = net operating income divided by capitalization rate. Gross income multiplier = price divided by gross rent.
Reconciliation weights the approaches by relevance: sales comparison for residences, income for investment property, cost for special-purpose buildings.
Traps
- Adjustments are made to the comparable, never to the subject.
- A rising cap rate lowers value.
- A comparative market analysis prepared by a licensee is not an appraisal; an appraisal requires a licensed or certified appraiser under Chapter 475, Part II, following USPAP.
Worked example
A duplex has $60,000 potential gross income, a 5 percent vacancy allowance, and $18,000 operating expenses. NOI = $57,000 minus $18,000 = $39,000. At an 8 percent cap rate, value = $39,000 divided by 0.08 = $487,500.