Property Valuation and Appraisal Principles
Three approaches
Sales comparison is primary for residential property: select the most similar closed sales, then adjust the comparables toward the subject. If a comparable is superior, subtract; if inferior, add. Cost approach suits new or special-purpose construction: land value plus replacement cost minus depreciation. Income approach values income property by capitalizing net operating income (value = NOI ÷ cap rate) or by a gross rent multiplier (price ÷ gross rent).
Concepts to master
Market value (most probable price under arm's-length conditions) is not the same as price or cost. Highest and best use is the reasonably probable, legally permissible, financially feasible, maximally productive use. Reconciliation weights the approaches and produces a single opinion. USPAP governs appraisal practice; appraisers are licensed or certified through the New Jersey Board of Real Estate Appraisers, and appraiser independence rules prohibit pressure from brokers, lenders, or sellers.
Broker vs. appraiser
A licensee may prepare a comparative market analysis to price or advise a client, but may not call it an appraisal or perform an appraisal for a fee. Never suggest a value to an appraiser or offer access in exchange for a number.
Traps
- Adjusting in the wrong direction (adding for a superior comparable).
- Using gross income instead of net operating income in a capitalization problem.
- Confusing the cap rate with the mortgage rate.
Worked example
A duplex produces $72,000 gross income with $12,000 operating expenses, so NOI is $60,000. At an 8% cap rate, indicated value is $60,000 ÷ 0.08 = $750,000. If the sale price were $800,000, the implied cap rate would be 7.5%.