Real Estate Appraisal Process
For commercial real estate assignments, your appraiser
will first meet with you to determine the purpose and function of the appraisal. Once the scope of the project is outlined,
he or she will inspect the property, become familiar with
the neighborhood, develop a list of comparable land
and/or building sales and carefully assess the market
trends. We generally apply all relevant approaches to
value and reconcile the validity of each in the report.
Our final opinion of value is clearly stated and supported.
Approaches to Value
The valuation process for real estate most typically
involves the utilization of three methods of valuation
often referred to as "approaches." The approaches
to valuation of real estate are briefly described as follows:
Cost Approach
In the cost approach, an estimated reproduction or replacement cost of the building and land improvements as of the
date of valuation is developed together with an estimate of the losses in value that have taken place due to wear and tear,
design and plan, or neighborhood influences. To the depreciated building cost estimate, the estimated value of the land
is added. The total represents the value indicated by the cost approach.
Sales Comparison Approach
In the sales comparison approach, the subject property is compared to similar properties that have sold or for which listing
prices or offering figures are known. Data for generally comparable properties is used, and comparisons are made
to demonstrate a probable price at which the subject property would sell if offered on the market.
Income Capitalization Approach
In the income capitalization approach, the rental income to the property is shown with deductions for vacancy and collection
loss and expenses. The net operating income of the property is based upon actual (current market) and estimated leases.
An applicable capitalization method and appropriate capitalization rates are developed and used in computations that result
in an indication of value commensurate with the risks for the subject property.
Market Value
In most cases, we estimate what is known as market value. Market value is defined, by the Appraisal Institute, as:
"The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms,
for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions
requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming
that neither is under undue duress."
This definition also assumes that there is a consummation of the real estate sale as of a specified date and the passing
of title from seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated.
2. Both parties are well informed or well advised, and each doing what he considers in his own best interest.
3. A reasonable time is allowed for exposure in the open market.
4. Payment is made in cash in U.S. dollars or its equivalent.
5. Financing, if any, is on terms generally available in the community at the specified date and typical for the property type
in its locale.
6. The price represents a normal consideration for the property sold unaffected by special financing amounts and/or terms, services, fees, costs, or credits incurred in the transaction.