Appraisal Methods and Property Valuation

Appraisal Exam: A Comprehensive Overview

Appraisal Methods

Appraisal methods are the techniques used by appraisers to estimate the value of a property. These methods include:

• Sales Comparison Approach: This method involves comparing the subject property to similar properties that have recently sold to determine the property's value.
• Cost Approach: In this approach, the value of the property is determined by adding the cost of the land and the cost of all improvements made to the property.
• Income Approach: The income approach estimates the value of the property based on its potential revenue-generating ability.
  • Capitalization of Ground Rent: This method is used for properties with long-term leases, where the value of the land is determined by the rent received from the lease.
  • Hypothetical Lease Income and Apply a Capitalization Rate: This method is used when the subject property is a long-term lease, such as a commercial building or a parking lot. The value of the property is determined by estimating the potential income from the lease and applying a capitalization rate.
• Reconciliation of Value Indications: This method involves combining the results from multiple appraisal methods to arrive at a final estimate of the property's value.

Tax Assessment

Tax assessment is the process of determining the value of a property for the purpose of calculating property taxes. This value is typically based on the market value of the property. In some cases, tax assessments may be based on a property's assessed value, which is a percentage of its market value, as in the case of ad valorem taxes.

Appraisal Regulations

Appraisal regulations vary by jurisdiction and are governed by professional organizations, such as the Appraisal Institute and the National Association of Realtors. In the United States, the Appraisal Foundation develops and promulgates appraisal standards and regulations.

Property Valuation

Property valuation is the process of determining the value of a property using appraisal methods. The value of a property can be influenced by various factors, including:

• Economic factors: Employment and interest rates
• Environmental factors: The presence of pollutants in the area or on the land
• Physical factors: The real estate's location, size, and condition
• Social factors: Demand for a particular type of housing or other property

Assessment Techniques

Assessment techniques are the specific methods used by appraisers to determine the value of a property. These techniques include:

• Capitalization of Ground Rent: This method is used for properties with long-term leases, where the value of the land is determined by the rent received from the lease.
• Hypothetical Lease Income and Apply a Capitalization Rate: This method is used when the subject property is a long-term lease, such as a commercial building or a parking lot. The value of the property is determined by estimating the potential income from the lease and applying a capitalization rate.
• Land Residual: This method involves estimating the net income for the property and then abstracting the value of the improvements, yielding an estimate of the residual or remainder value of the land.
• Cost of Development: This method is used primarily for land in transition (for example, agricultural to subdivision), where the value of the land is estimated by hypothetically developing the site and abstracting the land value from the projected sales price, minus costs.
• Abstraction: This appraisal technique involves subtracting from the sales price of improved parcels the full contributory value of all items attributable to the value of the improvements, thus yielding an estimate of the residual or remainder value of the land.