How is value determined by an Appraiser? We have three primary methods of identifying value, how much the market is paying for a similar property, how much it costs to build a similar property, and how much income can the property produce. An appraiser considers all three methods and selects the most appropriate for each assignment. Of these three methods, the most typical is the Sales Comparison analysis Method. We use the concept of Substitution: “The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the cost and sales comparison approaches are based”. Dictionary of real estate appraisal, 5th edition.
Appraisers will locate the most recent sales of the most similar properties located most close to the subject property. The real estate saying: “location, location, location” can have a great impact on value, so the best comparables are going to be located very nearby. The most recent sales are very important as markets are in constant change. The final primary characteristic that is of greatest importance is the effective age of the subject property. The actual age of a home is the starting point to identify the effective age of a home. When a home has major components updated, such as kitchen and bathroom remodeling, paint, flooring, roof, the home is now newer than its actual age. Once the effective age is calculated, those comparables with similar effective ages, similar overall condition, are selected as the most likely comparables. The appraiser may select as many as 10 to 15 likely comparables and we’ll pair that list down to the best sales using those three characteristics listed above. The appraiser will then identify the best comparable of those selected and place most weight in determining an opinion of value upon that sale. The report will explain which comparable is given the most weight and why.
As appraisers, we are required by federal regulations to provide clear and understandable reports that are not misleading and meet the standards of the profession.