Approaches to Value and the Appraiser’s Reconciliation Process
In most appraisals, the appraiser may develop up to three different “approaches to value,” each of which is simply a different lens on the same problem:
- Sales Comparison Approach: looks at what similar properties have actually sold for and adjusts those sales for key differences. For typical single-family homes, this is usually the strongest indicator because it best reflects how most buyers price homes in the open market.
- Cost Approach: estimates what it would cost to buy the land and build a similar home today, then subtracts depreciation (age/condition/functional factors) and adds site improvements. This approach can be very useful as a cross-check, but on older properties small differences in depreciation assumptions can move the value.
- Income Approach: estimates value based on the property’s income potential (rent), often using a Gross Rent Multiplier (GRM) or capitalization. This approach is most reliable when the typical buyer is an investor and when there is strong market rent/expense data.
Reconciliation (the final value opinion) is not an average of these three numbers. The appraiser is required to weigh each approach based on (1) how buyers in that specific market typically make decisions, and (2) the strength and relevance of the data available for each approach in that assignment.