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THE VALUATION PROCESS <br /> Valuation Methodology <br /> The traditional methods of processing market data into a value indication include: <br /> • Cost Approach; <br /> • Sales Comparison Approach; and <br /> • Income Capitalization Approach. <br /> The Cost Approach is based on the assumption that an informed purchaser would pay no more <br /> than the cost of producing a substitute property with the same utility. This approach is <br /> particularly applicable when the improvements being appraised are relatively new and represent <br /> the highest and best use of the land, or when the property has unique or specialized <br /> improvements for which there is little or no sales data from comparable properties. <br /> The Sales Comparison Approach is based on the assumption that an informed purchaser would <br /> pay no more for a property than the cost of acquiring another existing property with the same <br /> utility.This approach is especially appropriate when an active market provides sufficient reliable <br /> data that can be verified from authoritative sources. The Sales Comparison Approach is less <br /> reliable in an inactive market, or when estimating the value of properties for which no real <br /> comparable sales data is available. It is also questionable when sales data cannot be verified with <br /> principals to the transaction. <br /> The Income Capitalization Approach reflects the market's perception of a relationship between <br /> a property's potential income and its market value, a relationship expressed as a capitalization <br /> rate. This approach converts the anticipated benefits (dollar income or amenities) to be derived <br /> from the ownership of property into a value indication through capitalization. This approach is <br /> widely applied when appraising income-producing properties. <br /> In appraisal practice, an approach to value is included or eliminated based on its applicability to <br /> the property type being valued and the quality of information available. The reliability of each <br /> approach depends on the availability and comparability of market data as well as the motivation <br /> and thinking of purchasers. <br /> 56 <br />