Property Valuation and Appraisal Principles
Value, principles, and highest and best use
Market value assumes informed, willing, unpressured parties, reasonable exposure, and payment in cash or its equivalent. Highest and best use is the reasonably probable use that is legally permissible, physically possible, financially feasible, and maximally productive. Underlying principles include substitution, contribution, conformity, progression and regression, anticipation, and balance. Price is what was paid; cost is what it takes to build; value is the estimate.
The three approaches
Sales comparison (best for residences): adjust comps to the subject - if the comparable is superior, subtract; if inferior, add. Never adjust the subject. Cost approach (new or special-purpose property): land value + replacement or reproduction cost − depreciation (physical deterioration, functional obsolescence, external/economic obsolescence). Income approach (investors): value = net operating income ÷ capitalization rate; gross rent multiplier = price ÷ gross monthly rent.
Worked example: a duplex produces $84,000 effective gross income with $24,000 of operating expenses, so NOI = $60,000. At a 7.5% cap rate, indicated value = $60,000 ÷ 0.075 = $800,000. If the comparable subject sale was $800,000 and the subject has a new roof valued at $12,000 that the comp lacks, the adjusted indication from that comp for the roof difference would add $12,000 to the comp toward the subject.
Practice points
USPAP governs appraisal development and reporting; federally related transactions require a state-credentialed appraiser. A CMA or BPO is a broker's opinion, not an appraisal. Reconciliation weights the approaches rather than averaging blindly.
Traps: adjustments always run from the comparable to the subject, and cap rates move inversely with value. Rule of thumb: a higher cap rate means more risk and less value for the same income.