The Sales “Comparison” Approach to Value
The most widely used and accepted in residential practice is the sales comparison approach. This approach bases its opinion of value on what “similar” properties in the vicinity have sold for “recently”, with appropriate quantitative adjustments for time, acreage, living area, amenities and so on. These quantitative (numerical) adjustments are typically made for features with “significant” differences between the subject and the comparable property.
The sales comparison approach shows us the market’s reaction to other properties similar to the subject. The market’s reaction is reflected in the price that they are willing to pay for a property similar to the one being appraised.
The Cost Approach to Value
In the cost approach to value, the cost to acquire the land plus the cost of the improvements minus any accrued depreciation equals value. Depreciation is a loss in value from any cause, and can take the form of physical deterioration, functional obsolescence, or external obsolescence. The underlying premise of the cost approach is that “a potential user of real estate will not, or should not, pay more for a property than it would cost to build an equivalent.” In the appraisal world, this is known as the principle of substitution.
The Income Approach to Value
This approach considers the fact that some properties generate income for the owner such as rental properties. The rental income an owner might reasonably expect from a property is part of its value.
Despite there being three approaches to value, the Sales Comparison Approach (SCA) is often given the strongest consideration in the final value conclusion when it comes to determining "market" value as SCA is based on what has recently sold in the real estate market.