Property Valuation and Appraisal
The three approaches
Sales comparison is most reliable for residential resales. Cost applies replacement or reproduction cost new, minus depreciation, plus land value, and suits unique or new construction. Income uses direct capitalization (value equals net operating income divided by cap rate) or a gross rent multiplier, and suits investment property. Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive.
Adjustments
Adjust the comparables to the subject, never the subject to the comparables. If a comparable is superior, subtract; if inferior, add. Adjust market conditions or time first, then location, then physical differences. Do not double-adjust for something already reflected in the sale price. Reconciliation weighs the approaches by reliability; it is not an average.
Depreciation
Physical deterioration (curable or incurable), functional obsolescence such as an outdated floor plan, and external obsolescence from locational or economic forces. Land is never depreciated.
Traps
Treating a broker price opinion or comparative market analysis as an appraisal; adjusting the subject; applying price per square foot to dissimilar homes; mixing up cap rate direction; confusing reproduction cost with replacement cost; forgetting that USPAP governs appraisal practice and Oregon licenses appraisers separately from brokers.
Worked example: net operating income of $36,000 capitalized at 8 percent gives $36,000 ÷ 0.08 = $450,000. Using a gross rent multiplier of 120 on $1,500 monthly rent gives $180,000.