In the valuation of the subject property, three traditional approaches have been considered. The approaches are cost, sales comparison and income capitalization. In appraisal practice, an approach to value is included or omitted based on its applicability to the property being valued and the quality of information available. The final estimate of value considers the result of each approach utilized in this report.

Cost approach
The cost approach is a set of procedures through which a value indication is derived for the fee simple interest in a property by estimating the current cost to construct a reproduction of (or replacement for) the existing structure, including an entrepreneurial incentive, deducting depreciation from the total cost, and adding the estimated land value. Adjustments may then be made to the indicated fee simple value of the subject property to reflect the value of the property interest being appraised.

The first step in the cost approach is to estimate the land value of the subject property. The estimate is made by an analysis of comparable land sales. The second step is to estimate the replacement or reproduction costs of all improvements. Improvement costs are then depreciated to reflect value loss from physical, functional and external causes. The depreciated improvement costs are then added to the land value to produce a value indicator by the cost approach.

Sales comparison approach
The sales comparison approach is a set of procedures in which a value indication is derived by comparing the property being appraised to similar properties that have been sold recently, then applying appropriate units of comparison and making adjustments to the sale prices of the comparables, based on the elements of comparison. The sales comparison approach may be used to value improved properties, vacant land or land being considered as though vacant. It is the most common and preferred method of land valuation when an adequate supply of comparable sales is available.

The sales comparison approach to value uses sales of comparable properties, adjusted for differences, to indicate a value of the subject property. Valuation is often accomplished using a physical unit of comparison, such as a price per acre, or an economic unit of comparison, such as a gross rent multiplier. Adjustments are applied to the physical units of comparison derived from the comparable sales, and then the units of comparison are applied to yield a value indicator for the subject property.

Income capitalization approach
The income capitalization approach is a set of procedures through which an appraiser derives a value indication for an income-producing property, by converting its anticipated benefits (cash flows and reversion) into property value. This conversion can be accomplished in two ways. One year’s income expectancy can be capitalized at a market-derived capitalization rate or a capitalization rate that reflects a specified income pattern, return on investment and change in the value of the investment. Alternatively, the annual cash flows for the holding period and the reversion can be discounted at a specified yield rate.

In the income capitalization approach, the present value of the future benefits of property ownership is measured. A property’s income streams and its resale value upon reversion may be capitalized into a present, lump-sum value.

Reconciliation
Reconciliation is the last phase of any valuation assignment in which two or more value indications derived from market data are resolved into a final value opinion, which may be either a final range of value or a single point estimate.

The reconciliation process represents a weighing of the indicators derived above as to the indicator’s reliability and applicability to the appraisal problem at hand. A final value conclusion is then estimated based on the available data and the appraiser experience in appraising the type of property under analysis.

Tony Correia has more than 30 years experience in the appraisal of rural property. To comment on this article, e-mail edit@wines andvines.com.