The Sales Comparison or Market Data Approach is based on the principle of substitution; that a prudent person would pay no more for a property than cost to acquire another property or similar desirability or utility. The process involves the collection, analysis, and comparison of sales of similar utility and use to subject the property. After most transactions are identified, adjustments are made for such variables as changed in market conditions since date of sale, location, size, physical characteristics, and financing. The various sales produce indications of value for the subject property which is then reconciled into a single estimate of value.
The Income Approach is based on the principle of anticipation; that the value of a property may be measured by the present worth of anticipated future benefits accruing to the ownership and use of the property.The procedure involves estimating the gross income the property is capable of producing, then deducting vacancy / collection losses and expenses, which might be incurred in the operation. The resultant net income, as estimated by the appraisers, is converted to an indication of value through various means of caiptilization or discounting.
The income approach is often the most accurate methodology in the valuation of income producing properties. If sufficient sales of tenant - occupied comparables may be located , the income approach can provide a highly accurate value indication. This approach, however; has limited application for non-income properties such as a vacant land, one or two family residences, special purpose properties and small owner-occupied commericial uses.
This approach is based on the principle of substitution that no prudent person would pay more for a property than the cost to acquire a simiiar site and construct a building of equally desirability and utility, assuming no undue cost to delay. The procedure involves, first, estimating value of the site as if vacant. Anticipated costs necessary to reconstruct all improvements are then estimated, predicated upon labor and material prices prevailing on the appraisal date. From the construction cost estimate, deductions are made for accrued depreciation caused by physical depreciation, functional obsolescence, and economic obsolescence. The depreciated cost figure is added to the estimated value of the site, indicating the value of the property by the Cost Approach.
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