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Three Approaches to Value in Mississippi Home Appraisals

Valuation theory posits three basic approaches to estimating the fair market value of a single family home. For single-family residences, the market approach is considered the most reliable because if reflects the actions of buyers and sellers in the market place. Because of this, the market approach is generally given greater weight in an appraisal of residential property. The three approaches to value are summarized below.

The market or direct sales comparison approach to value. The market or sales comparison approach to value is an orderly process of comparing purchase prices, asking prices, and offers for comparable properties with the subject property to determine value. A comparison grid is usually used to help the Mississippi appraiser make adjustments between the subject property and the comparable sales. Adjustments are made for features such as location, gross living or building area, lot size, condition/effective age, market conditions, degree of remodeling, construction quality and significant amenities. When using the market approach to home valuation, the appraiser attempts to both estimate and analyze the anticipated reaction by a typical purchaser to the subject property.

The cost approach to value. The cost approach to value involves estimation of reproduction or replacement cost of a property, less accrued reduction in value. This method is based on the premise that an informed purchaser would pay no more for a property than it would cost to reproduce another property with the same utility.

The income approach to value. The income approach to value attempts to reduce the future income of a property to its current value, which is considered to be the value for the subject property. The value is based on an estimate of net income from the operation of an income producing property and the selection of the property capitalization rate from market indications of similar properties. The income approach relies heavily on the principal of anticipation, which holds that value is created by the expectation of benefits to be derived from possession, operation and/or capital gain at resale. The income approach is better suited for income-producing properties than for homes.