Different evidence answers different valuation questions. The sales comparison, cost and income approaches give appraisers ways to analyze a property. Their relevance depends on the assignment and available evidence. The approaches are not three numbers that should automatically be averaged.
Sales comparison
This approach considers sales of properties that help explain how the market values the subject. The analysis looks at meaningful similarities and differences. A nearby sale can still be a poor comparison if its features or market appeal differ substantially.
Cost
Cost analysis considers land and improvements, including the effect of depreciation, meaning the loss in value from age, wear or outdated features. It can help illuminate a property when replacement cost is relevant, but construction spending does not automatically equal market value. The analysis needs appropriate support for its inputs.
Income
Income analysis considers a property’s income-producing characteristics. It can be relevant to rental properties, where operating performance and investor expectations contribute to the analysis. Income and expense assumptions must be examined carefully.
Reconciliation
Reconciliation is the final step, where the appraiser weighs the approaches used and reaches one opinion of value. The appraiser considers the quality and relevance of the evidence, explains the strengths and limitations of the analysis and reaches a supported conclusion. The amount of weight given to an approach should follow the assignment and evidence.
The useful question is not whether every approach appears on every report. It is whether the report explains the analysis that fits the property.
General reference: Fannie Mae Selling Guide B4-1.3-08 (Comparable Sales) and B4-1.3-10 (Cost and Income Approach to Value). Educational reference only; not a certification of Avisso compliance.
This article describes general appraisal practice. It is not advice about a specific property or loan.
