Real Estate Valuation and Appraisal
Core concepts
Know the three approaches to value: sales comparison, income capitalization, and cost. The cost approach builds value as replacement (or reproduction) cost new minus depreciation plus land value; depreciation splits into physical deterioration, functional obsolescence, and external (economic) obsolescence. The sales comparison approach requires adjustment of comparables to the subject - adjust the comparable toward the subject, not the reverse. The income approach uses direct capitalization or discounted cash flow. Understand highest and best use as the reasonable, legally permissible, financially feasible, maximally productive use.
Traps
Direction of adjustments is the classic error: if the comparable is superior, subtract from the comparable's price. Questions may mix reproduction cost (exact replica) with replacement cost (equal utility). External obsolescence is incurable and often measured by rent loss capitalized. Don't apply land value to a depreciated structure twice. Reconciliation is not averaging - the appraiser weights approaches by relevance.
Worked example
A comparable sold for $400,000 and is superior to the subject by a $20,000 feature and inferior by a $5,000 lot size. Net adjustment: −$20,000 + $5,000 = −$15,000, giving an indicated value of $385,000 for the subject.
Rule of thumb
Adjust the comparable to look like the subject; superior comparable features reduce its adjusted price.