The Appraisal Defined

Professional real estate appraisers perform a useful function in society and offer a variety of services to their clients. They develop opinions of several types
of property value and assist in various decisions about real estate. Standards for the appraisal profession are set forth in the Uniform Standards of Professional Appraisal Practice (USPAP) developed by the Appraisal Standards Board of The Appraisal Foundation.* USPAP specifies the procedures to be followed in developing and communicating an appraisal and the ethical rules for appraisal practice. As defined in USPAP, an appraisal is the act or process of developing an opinion of value. The valuation process is a systematic procedure the appraiser follows to answer a client’s question about real property value. 

The most common type of appraisal assignment is the development of an opinion of market value. However, because of their specialized training and experience, appraisers can provide a wide range of additional appraisal services—from investment consultation to advice on various business as well as personal financial decisions. 




Understanding the Appraisal

In general, there are three methods for appraising a property’s value: the sales comparison approach, the income capitalization approach, and the cost approach. To give you a better understanding of each method, below we review all three in order to give you a better understanding of each. 

The Sales Comparison Approach

In the sales comparison approach, an appraiser attempts to find similar commercial properties that have sold recently in an attempt to estimate the price of the property in question. In general, the comparison properties should be located in the same area, be of similar size, and have similar features. After finding a similar comparison property, the appraiser then adjusts its sale price based on any features that the appraised property might have that are different than the comparison property. While this is a popular method, it may not always be the most accurate. 

The Income Capitalization Approach

Unlike the sales comparison approach, the income capitalization approach focuses on the income that can be generated by a commercial property in order to determine its market value. In general, this is determined by dividing the property’s net operating income (NOI) by it' Cap Rate. In most cases, an appraiser uses the sale price of other similar commercial properties in order to determine the property’s cap rate. 

The Cost Approach

The cost approach attempts to estimate the value of a property by determining the cost it would take to replace the property. The cost approach does not incorporate the income that the property produces into the calculation, and also assumes that the property will not sell for higher than its replacement cost. For those reasons, the cost approach is somewhat less popular for commercial real estate appraisals.

In many cases, an appraiser will use some combination of all three methods in order to determine an estimated value for a commercial property. They may also factor in other information, such as market trends, location, risks, and development potential.