Three approaches to value

Three approaches to value

There are three general groups of methodologies for determining value. These are usually referred to as the "three approaches to value"which are generally independent of each other:

• The cost approach
• The sales comparison approach and
• The income approach

However, the recent trend of the business tends to be clinging to the scientific methodology of appraisal which lies on the foundation of quantitative-data , risk and geographical based approaches . Pagourtzi et al. have provided a review on the methods used in the industry by comparison between conventional approaches and advanced ones

The appraiser using three approaches will determine which one or more of these approaches may be applicable, based on the scope of work determination, and from that develop an appraisal analysis. Costs, income, and sales vary widely from one situation to the next, and particular importance is given to the specific characteristics of the subject.

Consideration is also given to the market for the property appraised. Appraisals of properties that are typically purchased by investors (e.g. - skyscrapers) may give greater weight to the income approach, while small retail or office properties, often purchased by owner-users, may give greater weighting to the sales comparison approach. While this may seem simple, it is not always obvious. For example, apartment complexes of a given quality tend to sell at a price per apartment, and as such the sales comparison approach may be more applicable. Single family residences are most commonly valued with greatest weighting to the sales comparison approach, but if a single family dwelling is in a neighborhood where all or most of the dwellings are rental units, then some variant of the income approach may be more useful.