Valuation & Finance

Market value is the most probable price a property should bring in a competitive, open market under fair conditions. Price is what was actually paid; cost is the dollars spent to build or improve.

An appraisal is an unbiased estimate or opinion of value of a property as of a specific date, prepared by a licensed or certified appraiser using recognized methods.

The sales comparison (market data) approach estimates value by comparing the subject to recently sold similar properties, adjusting the comparables' prices for differences. It is the primary method for residential value.

The cost approach estimates value as land value plus the cost to reproduce or replace improvements, minus accrued depreciation. It is best for new, unique, or special-purpose properties.

The income approach values income property by capitalizing net operating income: Value = NOI ÷ capitalization rate. The simpler gross rent multiplier (GRM) applies to small residential rentals: Value = gross rent × GRM.

The capitalization rate expresses the relationship between a property's net operating income and its value: cap rate = NOI ÷ value. A higher cap rate implies higher risk or lower value.