Applied Real Estate Appraisal
Approaches to value
Applied appraisal questions test the three approaches and reconciliation. Sales comparison estimates value from closed sales, listings, and contracts, with adjustments to the comparables so they reflect the subject. Adjust the comparable to the subject: if the comparable is superior, subtract; if inferior, add. A frequent trap is reversing direction or adjusting the subject instead of the comparable. The cost approach is most reliable for new or special-purpose improvements; subtract accrued depreciation from replacement or reproduction cost and add site value. Income capitalization converts expected income into value, using NOI for direct capitalization and gross rent for a gross income multiplier.
Income and cost details
NOI is potential gross income less vacancy and collection loss plus other income, less operating expenses-but not debt service, income taxes, or depreciation. Cap rates move inversely with value when income is constant. In the cost approach, distinguish physical deterioration, functional obsolescence, and external obsolescence; effective age reflects condition and utility, not simply chronological age.
Worked example
A comparable sold for $300,000. It is superior to the subject by $15,000 for a renovated kitchen and inferior by $10,000 because it lacks a garage. Adjusted value = $300,000 − $15,000 + $10,000 = $295,000. The order of adjustments is less important than consistent direction and market support.
Reconciliation and traps
Reconciliation is not averaging; weigh the approaches by relevance and reliability. Avoid double-counting an item, applying a cap rate to gross income, or using a GRM with net income. Confirm that the value date, property rights, and conditions of sale match the assignment.