written by Anna Hellman
As mentioned in the last blog, the appraisal process is complex and uses multiple appraisal approaches in order to establish a property’s market value. There are 3 main approaches that focus on different aspects of the property. For this blog, we will discuss each approach along with their individual pros and cons.
Sales Comparison Approach
As you could probably guess, this approach uses comparable properties that have similar locations, property descriptions, and local markets. The idea is if another property recently sold at a particular price than your matching property with a similar price point, should sell comparatively. Since two properties can never be the same, the appraiser will make adjustments to the value. These appraisals are often used for single or multi-family homes because they offer the greatest amount of comparable sales. Often valuable homes with small/private barn use this approach.
Pros:
- Based on the market
- Easiest approach for owners to understand
- Owners can often double-check the accuracy of the comparable properties
Cons:
- A location with few comparable properties and a large amount of adjustments can lead to an inaccurate appraisal
- Must be careful to not include the sales of local foreclosures or auctions
Income Approach
This approach is most often for properties that are expected to generate income or already have in the past. The property value is based off the net operating income (NOI), which in the horse world often means the expected rental income. The NOI can be determined by the previous owners’ income records or by the income of comparable properties. Appraisers are not expected to know the income of the property; they are relied upon to estimate how changes in the market will influence the property’s income. The income approach can be used for equine boarding barns since they have an established rental income.
Pros:
- Based on the income of the property
- A valuable approach for large, income-producing properties that have few comparable properties
Cons:
- Cannot be used for non-income producing properties such as family homes or public facilities
- Appraisers can only estimate the future changes in the market, leaving room for error
Cost Approach
This is often the least-used approach along with the most difficult to describe. For appraisers to determine the cost of a property, they estimate how much it would cost to build that exact property in modern-day times. They then subtract the property’s depreciation and add the value of the land, resulting in the value of the property. Depreciation includes the physical deterioration of the property, how outdated the construction methods and style of the property is compared to current times, and if the location has become worse due to violence, traffic, etc. This approach is very useful for unique properties that have few comparable sales and do not bring in an income, such as old barns with many acres.
Pros:
- Based on the cost of the property
- Often important for old properties that are being evaluated by developers
Cons:
- Very difficult to accurately determine the depreciation
After reading about these approaches, I hope it has become evident how crucial it is to have a skilled appraiser. Since appraisals have so much power over an owner’s property, do not choose the cheapest appraiser. Try to find an appraiser that is highly educated, reputable, and has experience evaluating properties similar to your own.
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