Real estate appraisal
Real estate appraisal answers the questions of "what is my property worth," valuation, and "what should it be used for," highest and best use. Three approaches to value are used. The Cost Approach, the Direct Sales Comparison, and the Income Approach.
The Cost Approach is based on the principle of contribution, or what would it cost to replicate the subject property's land, building, site improvement costs, including entitlements, less physical, functional, and economic depreciation.
The Direct Sales Comparison approach looks at the price (commonly measured by price per square foot or price per unit) of similar properties being sold in the marketplace.
The Income Approach capitalizes an income stream into a present value. This can be done using revenue multipliers or single-year capitalization rates of the net operating income. Net operating income (NOI) is gross potential income (GPI) less vacancy (= Effective Gross Income) less operating expenses (excluding debt service or depreciation charges applied by accountants). Alterantively, multiple years of net operating income can be valued by a discount cash flow analysis (DCF) model.
The three approaches are evaluated to derive an opinion of value. In theory, the three approaches should equal. If the spread is greater than 10% to 15%, then the appraiser has likely mis-valued or mis-accounted for an economic variable.
Automated Valuation Models (AVMs) are growing in acceptance. These rely on statistical models such as multiple regression analysis and geographic information systems (GIS).
To major documents govern, Uniform Standards of Professional Appraisal Practice (USPAP) and FIRREA.
"The Appraisal of Real Estate, 12th Edition," by The Appraisal Institute ([www.appraisalinstitute.org]) is an industry recognized textbook.
