The Three Approaches to Value: How Appraisers Triangulate an Opinion of Value
The Sales Comparison Approach
This approach derives value by analyzing recent sales of similar properties and adjusting for differences in location, size, condition, and other characteristics. It is the most widely applied approach across property types when an adequate pool of comparable data exists, and it is often given significant weight even when another approach is primary, as a reasonableness check.
The Cost Approach
The cost approach estimates value by summing the land value and the depreciated cost to reproduce or replace the improvements. It carries the most weight for new construction, special-purpose properties, and assignments where sales or income data is limited — schools, houses of worship, and other properties with few comparable transactions.
The Income Capitalization Approach
This approach converts a property’s income stream into a present value estimate and is typically the primary approach for office, retail, industrial, and multifamily properties, where an investor’s purchase decision is driven chiefly by the return the property can generate.
Reconciliation, Not Averaging
When more than one approach is developed, the appraiser does not simply average the results. Each approach is evaluated for the reliability and quantity of its underlying data and its applicability to the specific assignment, and the appraiser reconciles the indications into a single, well-supported opinion of value.
Why the Distinction Matters for Clients
Knowing which approach or approaches an appraiser relied upon — and why — helps clients, lenders, and attorneys evaluate whether a report’s methodology fits the assignment, and gives them a framework for asking informed questions about the conclusion.
A property’s current use is not automatically its highest and best use, and zoning alone does not settle the question — appraisers also weigh the probability of a zoning change, market demand, and development feasibility before reaching a conclusion.