The appraiser does not determine value but estimates the most probable price at which the property would sell, when market value is the purpose of the appraisal. In order to do so, the appraiser typically employs at least one of the three traditional approaches of value, the Sales Comparison Approach, the Income Approach, and the Cost Approach. Which approach to value is applicable for your property will depend on the type of property and the quantity and quality of data available to the appraiser. For single-family homes, the Sales Comparison and the Cost approaches are most common. The Sales Comparison Approach relies upon the economic principle of substitution and the appraiser analyzes recent sales of homes as similar to your property as possible. In this analysis, the appraiser accounts for material differences between the properties for items such as total living area, bathrooms, garage area, etc. The Cost Approach is also based on the principle of substitution and is an estimate of the cost required to build an exact replica of your home or a suitable replacement based on current market standards, less any accrued depreciation. In the appraisal of single-family homes, the Sales Comparison Approach is often the most applicable.
The Income Approach relies on the economic principle of anticipation. This approach considers a properties ability to generate revenue and the markets expectation of the relationship of the anticipated income to value. This approach is most applicable to commercial properties and income producing residential properties.
