What Is the Appraisal Approach?

The appraisal approach describes the process of estimating an asset's value, based on factors such as its cost, the income it generates, and its 澳洲幸运5官方开奖结果体彩网:fair market value (FMV) compared to that of similar assets. The resulting appraisal figure is essentially an educated guess that attempts to forecast the price an asset would likely fetch in a free market. While appraisals are typically performed in conjunction with a sale of an item, they may also be conducted for 澳洲幸运5官方开奖结果体彩网:insurance or taxation purposes.

Understanding the Appraisal Approach

The appraisal approach is used to determine the worth of high-value assets such as real estate properties, objects of art, jewelry, vehicles, financial interests in oil fields, and other alternative assets. The values of these items are difficult to quantify because they don't change hands often enough to reliably generate current 澳洲幸运5官方开奖结果体彩网:market prices the way publicly-traded stocks and other 澳洲幸运5官方开奖结果体彩网:securities do. Consequently, the value of such items must be estimated by qualified individuals known as 澳洲幸运5官方开奖结果体彩网:appraisers.

Appraisal Approach Requirements

Appraisals are only deemed legitimate if conducted by disinterested parties who are certified and licensed by state regulatory boards. Appraisers must meet the Universal Standards of Professional Appraisal Practice (USPAP) guidelines and pass the relevant academic courses. Appraisers must possess expert knowledge in their given areas of specialty. Case in point: a diamond ring should only be evaluated by an experienced jeweler, and not by a real estat💦e analyst.

The Three Appraisal Approaches for Real Estate

Real estate is typically appraised if it's being sold or if the owner seeks to 澳洲幸运5官方开奖结果体彩网:refinance the existing mortgage on their property. An appraisal aims to determine a property's value that reflects its condition, age, location, and other relevant characteristics. This action helps discourage banks from loaning more money to borrowers than the properties are worth.

Appraisers rely on the following three methods of establishing real estate propertyꦡ values:

1. Sales comparison. This is the most common method, where appraisers value a property based on the recent selling prices of similar properties in the same neighborhood. To accomplish this, at least three 澳洲幸运5官方开奖结果体彩网:comparable properties must be reported within the last year, in an open and competitive market.
2. 澳洲幸运5官方开奖结果体彩网:Cost approach. This practice operates under the premise that a property’s value should equal the cost of building an equivalent building, taking into account the cost of the land and construction expenses, less 澳洲幸运5官方开奖结果体彩网:depreciation. After all, it would be economically illogical for a home buyer to pay more for a property than it would cost to build a similar structure from scratch.
3. 澳洲幸运5官方开奖结果体彩网:Income approach. Sometimes referred to as the "income capitalization approach," this estimates the value of a property based on the income it generates. It’s calculated by taking the net operating income (revenue the property generates minus operating expenses), and dividing it by the 澳洲幸运5官方开奖结果体彩网:capitalization rate—the expected rate of return.