To appraise real - estate means to estimate its value. Although there are many types of value the most common objective of an appraisal is to estimate market value, the most probable sale price of a property.
Appraisal are concerned with values, cost and prices. Value is an estimate of future benefits, cost represents a measure of past expenditures, and price reflects the actual amount of money paid for a property.
Basic to appraising are certain underlying economic principles, such as highest and best use, substitution, supply and demand, balance, conformity, regression and progression, anticipation, plottage, increasing and decreasing returns, contribution, competition, and change.
A professional appraiser analyzes a property through three approaches to value. In the sales comparison approach, the subject property is compared with others like it that have sold recently. Since no two properties are exactly alike, adjustment must be maid to account for any differences. With the cost approach, an appraiser calculates the cost of building a similar stracture on a similar site. Then the appraiser subtracts depreciation (loss in value), which reflects the difference between new properties of this type and the subject property in it's present condition. The income approach is an analysis based on the relationship between the rate of return that an investor requires and the net income that a property produces.
An offshot of an income approach, the gross rent multplier (GRM), is often used to estimate the value of single -family residential properties that are not usually rented but could be. The GRM is computed by dividing the sales price of a property by its gross monthly rent.
Normally, the application of the three approaches results in three different estimates of value. In the process of reconciliation, the validity and reliability of each approach are weighed objectively to arrive at the single best and most supportable conclusion of value.