Market value

When people refer to the value of property, they most generally mean the market value. The market value is the price for which a property will sell in the open mar­ket if the seller is not under any extreme pressure to sell and the buyer is not under any extreme pressure to buy, with a reasonable time allowed the broker to effect the sale. It is also assumed that both the seller and prospective buyer are fully informed of all uses to which the property is adapted and for which it is capable of being used.

Appraisal

To appraise means to arrive at an estimate and opinion of the value of a property. An appraisal is usually a statement of the mar­ket value and/or value for loan purposes of a particular piece of property as of a specific date. It is generally accepted there are three ways to approach a value estimate:

(1) market-comparison approach,

(2) cost approach,

(3) income-capitalization ap­proach.

The market-comparison approach

This is the most commonly used of all ap­proaches to value. Quite simply, the broker finds comparables; that is, he finds proper­ties very similar to the one he is appraising. These comparables must be properties that have sold recently. By comparing the sell­ing prices of these properties, the broker can arrive at a valid estimate of value for the property he is appraising. Comparable properties that have been placed on the market but have not sold are excellent indi­cators of the uppermost limit of value.

The market-comparison approach is the one most generally used by real estate brokers and salesmen. It lends itself well to the appraisal of land, buildings, and other properties that exhibit a high degree of sim­ilarity and for which a ready market exists. This method is also particularly applicable as a check against the other two methods of appraising, when the end result is to obtain a market value.

The cost approach

The cost approach to value, also called "reproduction-cost approach" or "replace­ment-cost approach" is relatively simple in principle. The cost approach is an estimate of the amount of money that would be nec­essary to duplicate the property under ap­praisal. Since people ordinarily will not pay more for a property than it would cost to re­place the property or to obtain an equally satisfactory substitute property, the cost approach tends to set the upper limit of value.

The key to the correct use of the cost ap­proach is the amount of depreciation the appraiser must allow for property that is not new.

The capitalization-of-income approach

The income approach is concerned with the present worth of future income of property. This method is particularly important in the valuation of income-producing proper­ties. It is measured by the net income one assumes the property will produce during its remaining economic life.

Appraisal organizations

A number of appraisal organizations work to standardize and upgrade techniques of appraising. They award professional designations, have various qualification for membership, and subscribe to a code of ethics and rules of conduct. Requirements may include a certain number of years of experience, educational and course work, certain tests, and preparation of appraisal reports.