The Appraisal Process Explained
Introduction
Every appraisal follows a structured process designed to ensure fairness, accuracy, and compliance with professional standards. At Stein Valuation, we apply three time‑tested approaches to value—Cost, Sales Comparison, and Income—depending on the property type and purpose of the assignment. Before those approaches are applied, we first determine the property’s Highest & Best Use, which sets the foundation for the entire analysis.
Highest & Best Use
Before any valuation method is applied, an appraiser must determine the property’s Highest & Best Use, the most profitable, legal, and feasible use of the property. This step ensures that the valuation reflects not just what the property is, but what it could be under realistic conditions.
The Four Tests
Physically Possible – Can the site support the use given its size, shape, and topography?
Legally Permissible – What use, including current use, is allowed under zoning, land‑use regulations, or deed restrictions?
Financially Feasible – Would the use generate a positive return after costs?
Maximally Productive – Of the feasible options, which use yields the highest value?
Why It Matters
Establishes the foundation for all valuation approaches.
Ensures the appraisal reflects market reality, not just current use.
Critical for land, redevelopment sites, and properties with multiple potential uses.
Cost Approach
The Cost Approach answers a simple question: What would it cost to build this property today, minus all forms of depreciation, plus land value? It’s especially useful for new construction, special‑use properties, or unique assets, where comparable sales are limited.
How It Works
Estimate Land Value – Determine the value of the site as if vacant, based on comparable land sales.
Estimate Replacement or Reproduction Cost – Calculate the cost to construct the building today—either as an exact replica (reproduction) or with modern materials and standards (replacement).
Deduct Depreciation – Account for physical wear, functional obsolescence, and external factors that reduce value.
Add Land Value + Depreciated Improvements – Combine the land value with the depreciated building cost to arrive at an indicated property value.
When It Matters
New or nearly new properties where construction costs are reliable.
Special‑purpose properties (churches, schools, government buildings) with few comparable sales.
Insurance appraisals where replacement cost is the key measure.
In lagging markets when we are in real estate recessions, buyers often look to depreciated construction cost plus land for price guidance, the cost approach can set a floor value.
Sales Comparison Approach
The Sales Comparison Approach is the most familiar method of valuation—it answers the question: What are similar properties selling for in today’s market? By analyzing recent sales of comparable properties, adjustments are made for differences to estimate the subject property’s value.
How It Works
Identify Comparable Sales – Select recent transactions of properties similar in location, size, use, and condition.
Analyze Key Differences – Compare features such as square footage, age, quality, amenities, and site characteristics.
Adjust for Differences – Apply upward or downward adjustments to account for variations between the subject and the comparables.
Reconcile Indicated Values – Review the adjusted sales prices and determine a supported value conclusion for the subject property.
When It Matters
Residential properties where abundant comparable sales exist.
Land appraisals where sales of similar parcels provide the best evidence.
Commercial properties in active markets with reliable transaction data.
Income Approach
The Income Approach answers the question: What is this property worth based on the income it produces? It’s most relevant for income‑producing properties such as apartments, retail centers, office buildings, and industrial facilities.
How It Works
Estimate Potential Income – Analyze market rents, occupancy rates, and other revenue sources to determine the property’s income potential.
Deduct Operating Expenses – Subtract typical expenses such as management, maintenance, insurance, and property taxes to calculate net operating income (NOI).
Apply a Capitalization Method –
Direct Capitalization: Divide NOI by a market‑derived capitalization rate to estimate value.
Discounted Cash Flow (DCF): Project income and expenses over time and discount them back to present value.
Reconcile the Indicated Value – Review the results and ensure they align with market conditions and the property’s risk profile.
When It Matters
Apartments and multifamily housing where rental income drives value.
Retail, office, and industrial properties with established lease structures.
Investment properties where buyers and sellers focus on return on investment.
Reconciliation
After applying the Cost, Sales Comparison, and Income Approaches, the appraiser must reconcile the results. This is where professional judgment comes into play.
How It Works
Review Each Approach – Consider the reliability of the data and the relevance of each method to the property type.
Weigh the Evidence – Some approaches may carry more weight (e.g., Income Approach for apartments, Sales Comparison for residential).
Conclude a Final Value – Arrive at a single, defensible opinion of value supported by the strongest evidence.
Why It Matters
Provides a clear, supported conclusion rather than three separate numbers.
Demonstrates the appraiser’s expertise in weighing data quality and market context.
Ensures the final opinion of value is both defensible and practical for the intended use.
Conclusion
Understanding the appraisal process helps you see how value is determined. If you need a defensible, IRS‑compliant appraisal for estate, gift, or consulting purposes, Stein Valuation provides clarity and confidence at every step.