We are now officially in the holiday season — the season of giving. As an appraiser, I am asked frequently by homeowners, real estate agents, and even by other appraisers, “What do you give for BLANK value?” (“BLANK” in this context can be anything related to real estate from a window, to a garage, to vacant land, to an entire structure.) The question is one that troubles me because of the word “give.” My response to such a query is always, “Appraisers do not give value; we estimate value.”
Each property and every locale are different. There is no set value for any specific real estate or property feature. The Super Appraisal Blogger, Ryan Lundquist put it best, “A Little Black Book of Value Doesn’t Exist in Real Estate.” When an appraiser makes value adjustments, each must be supported using appraisal techniques that can withstand peer review. For instance, garage space in a high-rise downtown Portland condominium likely has a much different value than garage space in a suburban Portland location.
The three tools that an appraiser has to determine the value of anything (including adjustments for individual features or the value of the entire property) are the cost, the income, and the sales comparison approaches. When applied correctly, all of these methods are market derived and credible. Each of the three approaches has many variations that the appraiser can use to estimate value rather than give value.
The Cost Approach uses estimates of new home cost (or features) and depreciates that cost based on condition or the market acceptance. A garage might have a cost new of $20,000 and the market-derived depreciation data (including condition and market response for other factors) suggest a value of something different. Appraisers are uniquely aware that cost often does not equal value; therefore, we consider depreciation carefully.
The Income Approach is based around many different ways to assign present value to the likelihood of future income. For example, a garage might add $100 per month in rent to a particular property. Using the simplest of income approach methods, if similar sales suggest value is roughly one hundred times the gross monthly rent, we might conclude that the income approach suggests that the garage value is $10,000.
The Sales Comparison Approach uses similar sales of carefully-selected properties to estimate value. To isolate the value of a specific feature, appraisers might use paired sales of properties that are similar except for that feature. Since strong individual paired sales are often unavailable, an appraiser might use several adjusted pairs, statistical regression models, or groups of sales to isolate a particular feature. A sample of similar properties without a garage compared to a sample of similar properties with a garage might provide the evidence that an appraiser needs to strongly and quickly support a garage adjustment. In this example, appraisers need to be careful that the properties with garages do not tend to have other value-added features (that the properties without garages do not tend to have) that were not controlled for in the sample.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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