"Under the Hood" > Theory & Process
The Three Approaches to Property Value
There are three ways to determine the value of just about anything and each plays a part in property appraisals.
The most widely-used and accepted in residential practice is the Sales Comparison Spproach.
This approach bases the opinion of value on what similar properties in the vicinity have sold for recently using appropriate adjustments for time, acreage, living area, amenities and so on.
It is these adjustments where the expertise of the professional appraiser becomes necessary; no computer can tell you how much or little a fireplace is worth without knowing the neighborhood or even talking to Realtors and recent buyers in the area about the importance of that amenity in that particular location.
Another approach is the cost approach.
How much would a dwelling cost to replace, i. e., rebuild, minus accrued depreciation (depreciation that has occurred since the dwelling was built)?
The cost approach includes concepts like "economic life" and "effective age" that are primarily used in determining the value of special use properties, special purpose properties or properties where subsequent structural improvements greatly impact its value.
The third approach to value is called the income approach.
Some properties generate income for their owners. The most obvious examples are rental properties such as apartment buildings, non owner-occupied houses and duplexes.
The rental income an owner might reasonably expect from a property is part of its value. For a purely owner-occupied residential property, this may not be applicable but it can be important if the property is to be rented or used otherwise to generate income, such as a storage facility, cell tower rental, etc.