Property Valuation and Appraisal
Value, price, and the three approaches
Price is what a transaction produced; market value is the most probable price in a competitive, arms-length sale with informed parties and reasonable exposure time. Cost is what it would take to build. Appraisers apply the sales comparison approach (adjust comparable sales toward the subject - add when the subject is superior, subtract when the comp is superior), the cost approach (land value plus replacement cost minus depreciation, most reliable for unique or new buildings), and the income approach (best for income property).
Principles and depreciation
Key principles: substitution (a buyer pays no more than the cost of an equal substitute), highest and best use, contribution, conformity, and anticipation. Depreciation comes in three flavors - physical deterioration, functional obsolescence (outdated layout), and external/economic obsolescence (a new freeway, a lost employer). Only functional and external obsolescence are incurable in the short run.
The math tools
Gross rent multiplier = price ÷ gross monthly rent; apply it to the subject's rent to estimate value. Capitalization rate = net operating income ÷ value, so value = NOI ÷ cap rate. Higher cap rate generally means higher risk or lower price.
Nevada note
Appraisers are licensed and certified through the state real estate regulator and must follow professional appraisal standards; a broker's opinion of value is not an appraisal.
Worked examples: A duplex with $50,000 NOI in a market with an 8% cap rate is worth 50,000 ÷ 0.08 = $625,000. If the comparable sold for $360,000 at $1,800 monthly rent, the GRM is 200; the subject renting for $1,900 indicates about $380,000.