Curious About the Real Estate Appraisal Process?

Demystifying Valuation, Economic Damages + Forensic Accounting

The most common type of real estate appraisal assignment is the formulation of an opinion of market value.  The following information describes each step of the appraisal process.

Identification of the Assignment Parameters
The appraiser will identify the client, intended users and use as well as the purpose. A crucial element to any appraisal is the effective date of valuation as this will determine the data to be selected and analyzed to formulate the opinion of value.

Scope of Work Determination
The appraiser will determine the appropriate scope of work relating to the amount and type of research and analyses to be applied.

Data Collection and Property Description
The appraiser collects data relating to the general market area, specific characteristics of the subject property and comparable properties in the local market.

Data Analysis
Assessment of comparable properties provides specific data regarding sale prices, rental terms, rates of return and depreciation.  This step also includes the “highest and best use” analysis in which the appraiser considers the use of the land as if vacant and the property as improved.

Application of the Approaches to Value
There are three approaches to value; cost, sales comparison and income capitalization.  The appraiser formulates an opinion of property value using one or more of the approaches depending on the type of property, specified use of the appraisal and availability of data.

  • Cost Approach – the value is derived by obtaining the current cost of replacing the improvements, adding estimated land value and subtracting depreciation. This approach is very useful in valuing recent improvements and properties that are not frequently sold.
    • Sales Comparison Approach – used when a number of similar properties have been sold or are currently for sale in the subject property’s market.  The subject property is compared to similar properties referred to as comparable sales.  The sale prices of the most comparable properties indicate a range in which the value of the subject property falls.
    • Income Capitalization Approach – used for income producing properties purchased as an investment.  The earning potential of the property is measured as the present value of the future benefits of property ownership.

Reconciliation of Value Indications and Final Opinion of Value
The appraiser uses his or her experience, expertise and professional judgment to resolve the differences in value derived from the application of the three approaches to value.

Report of Defined Value
The report will be presented in one of three written formats:  self-contained, summary or restricted-use.  An oral report may be communicated when circumstances do no permit or warrant a written report.

The complex appraisal process provides a model to be followed in performing market research and data analysis as well as drawing on the appraiser’s personal expertise in applying appraisal techniques to formulate the results into an opinion of market value.


Source:  Appraisal Institute