The Three Approaches to Value
There are three approaches to determination of property value: the
the market sales comparison approach, , and the
income approach. These
approaches are based on three aspects of value:
The value indicated by recent sales of comparable properties in the market, with
adjustments for age, condition, and other characteristics
The cost of reproducing or replacing a property minus accrued depreciation
The investment value represented by the net earning power of a property based on
the capitalization of the income stream.
Generally accepted procedure is to utilize as many of the three industry accepted
approaches as possible in an appraisal. Choose the most appropriate as the principle
method for the specific appraisal situation, and apply the other valuation approaches
to support the final value estimate.
There are situations where only one or two approaches may be used. For instance,
an owner-occupied residential property is not likely to produce rental income that
could be capitalized into an estimate of value through use of the income approach.
So, the sales comparison or cost approaches might be more appropriate. Vacant land
has no cost of improvements, so the cost approach would not be an appropriate method
for that situation.
Specialized properties such as mortuaries, hospitals or zoos do not typically change
hands enough to generate comparative sales, so the cost or the income approach might
be more appropriate in those cases.