Three approaches to value
There are three ways to determine the value of property. An appraiser will process each of these approaches to value if they are applicable to the property type and particular assignment requirements.
Sales Comparison Approach
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 adjustments for time, acreage, living area, amenities and so on. It is these adjustments where the expertise of the professional appraiser becomes necessary -- no computer can tell you how much or little to mark up for a pool, extra bedroom/bath, garage or premium view without knowing the neighborhood or even talking to Realtors and recent buyers in the area about how important that amenity is in that particular location.
Another approach is the cost approach. The appraiser determines what the cost would be to replace or rebuild the improvements - house, garage, porches, etc. The appraiser then subtracts the estimated "accrued depreciation" - depreciation that has occurred since the property actually was built. The cost approach includes concepts like "economic life", "effective age", "physical, economic and functional obsolescence" that require the expertise of appraiser to determine. The cost approach to valuation is most useful in determining the value of new homes, unusual or special use properties and properties where recent structural improvements greatly impact value.
The third approach to value is called the income approach. Some properties generate income for their owners -- the most obvious examples being rental properties such as apartment buildings, non owner-occupied houses, duplexes and the like. The rental income that an owner might reasonably expect from such a property is part of its value. For a purely owner-occupied residential property, this may not be applicable, since these properties are usually purchased for their market resale value and not for any income generation. Since most of the homes in non-rental neighborhoods are not rented, the apprasier usually does not have enough rental data to determine a GRM (gross rent muiltiplier) necessary to use the income approach. However, this approach will carry great weight in the valuation of income-producing properties.
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