There are three methods typically used by appraisers to value real property. These are the Cost Approach, Sales Comparison Approach and Income Approach. Not every method is applicable to every property.
The cost approach is a real estate valuation method that surmises that the price a buyer should pay for a piece of property should equal the cost to build an equivalent building. In cost approach appraisal, the market price for the property is equal to the cost of land, plus cost of construction, less
depreciation.
The sales comparison approach is also based on the principle of substitution: it uses sales of similar properties as a basis for comparison. It is rooted in the principal that the arms-length, negotiated sale price of similar properties, best indicates the market value of the subject property. Adjustments must be made for differences in attributes, such as location, size, quality, condition, special features.
The income approach is based on the anticipated income stream generated by the use of the property and the desired return on investment. In this approach, the income (net or gross) a property will generate is estimated. Capitalization rates (rate of return) or multipliers are used to predict value. This approach is used primarily for commercial and rental property.