Real Estate Valuation and Appraisal
The three approaches
Sales comparison is the primary approach for owner-occupied residential property; cost approach suits new construction or special-purpose buildings; income approach suits investment property. The guiding principles are substitution, contribution, conformity, and highest and best use, which must be legally permissible, physically possible, financially feasible, and maximally productive.
Adjustments and income math
In sales comparison, always adjust the comparable toward the subject, never the subject toward the comparable. If the comparable is superior (extra garage, newer roof), subtract; if inferior, add. Depreciation comes in three forms: physical deterioration, functional obsolescence, and external (economic) obsolescence. Only external obsolescence is generally incurable by the owner. Income approach: value equals net operating income divided by the capitalization rate. Gross rent multiplier equals price divided by gross rent.
Traps
Examiners love the assessed value distractor: a town assessment is a tax figure, not market value. Another: 'A CMA is an appraisal' (false, a licensee may prepare a comparative market analysis but must not call it an appraisal; appraisal licensure is separate). Watch also for adjusting the subject property instead of the comparables.
Worked examples
A comparable sold for $400,000 with a two-car garage; the subject has a one-car garage worth $15,000. Subtract $15,000: adjusted value is $385,000. Income: net operating income $60,000, cap rate 8 percent, so value equals $60,000 divided by 0.08, or $750,000.