The value of a property is determined by a large variety of factors, one of which is the method of appraisal that is used during the valuation process. There are three main methods that appraisers will use to determine what the value of a property is, each of which is significantly different from the others despite performing the same function, since they are each used for a specific type or classification of building. Understanding the differences between the types of real estate appraisals can help you choose the best appraisal technique for your property when buying or selling real estate.
Sales Comparison Appraisals
The sales comparison appraisal method is what is commonly used for the majority of residential properties, and seeks to determine the value of a property by looking at comparable properties in the area and seeing what they've sold for recently. This means that sales comparison appraisals tend to be fairly effective at adapting to shifts in the market, giving you a realistic idea of what your home may be worth. The downside of sales comparison appraisals is that they can struggle to value unique properties that do not have comparable counterparts in the surrounding area, and that unique features of your property may be over or undervalued due to a lack of reference in the area.
Cost appraisals seek to determine how much a building is worth by taking the cost of rebuilding the property, minus the amount of depreciation due to deterioration, needed repairs, or other damage that the building has experienced since it was built. Cost appraisals are commonly used for newly built structures, since they don't tend to have comparable structures on the market to determine a value through the sales comparison approach. However, this means that cost appraisals are ineffective at determining the value of any other type of building, which limits their applicability.
Income appraisals are another method of valuation that take into account the income generation of the building itself, and as such are only used with commercial and rental buildings. The appraisal will thus roll the income potential of the property into the actual property value, using either the sales comparison or the cost appraisal method above. This allows for commercial activity to actually generate property value, which is something that should be taken into account when buying or selling commercial properties or large rental units.