4

The Valuation Process

The valuation process is a systematic procedure an appraiser follows

to provide answers to a client’s questions about real property value. It
is a model that can be adapted to a wide variety of questions that re-
late to value. It can also be used—perhaps with some modification—to
answer questions not directly related to value, as in the case of review
and consulting assignments.
The valuation process begins when the appraiser enters into an
agreement with a client to provide a valuation service. Generally, the
terms of the agreement are satisfied when the appraiser delivers the
assignment results (opinions and conclusions) that were agreed upon
with the client. The objective of most appraisal assignments is to develop
an opinion of market value. The valuation process contains all the steps
appropriate to this type of assignment. The model also provides the
framework for developing an opinion of other defined values.
The valuation process is accomplished through specific steps. The
number of steps followed depends on the intended use
of the assignment results, the nature of the property,
the scope of work deemed appropriate for the assign- The valuation process is a
ment, and the availability of data. The model provides systematic set of proce-
a pattern that can be used in any appraisal assignment dures an appraiser follows
to provide answers to a
to perform market research and data analysis, to ap- client’s questions about real
ply appraisal techniques, and to integrate the results property value.
of these activities into an opinion of defined value. In
 addition to assisting appraisers in their work, models that apply the
valuation process are recognized by the market of appraisal users and
facilitate their understanding of appraisal conclusions.
Research begins after the appraisal problem has been identified and
the scope of work required to solve the problem has been determined.
The analysis of data relevant to the problem starts with an investigation
of trends observed at the market level—international, national, regional,
or neighborhood. This investigation (i.e., the market analysis) helps
the appraiser understand the interrelationships among the principles,
forces, and factors that affect real property value in the specific market
area. Research also provides raw data from which the appraiser can
extract quantitative information and other evidence of market trends.
Such trends may include positive or negative percentage changes in
property value over a number of years, the population movement into
an area, and the number of employment opportunities available and
their effect on the purchasing power of potential property users.
In assignments to develop an opinion of market value, the ultimate
goal of the valuation process is a well-supported value conclusion that
reflects all of the pertinent factors that influence the market value of the
property being appraised. To achieve this goal, an appraiser studies a
property from three different viewpoints, which are referred to as the
approaches to value.
1. In the cost approach, value is estimated as the current cost of repro-
ducing or replacing the improvements (including an appropriate
entrepreneurial incentive or profit), minus the loss in value from
depreciation, plus land value.
2. In the sales comparison approach, value is indicated by recent sales
of comparable properties in the market.
3. In the income capitalization approach, value is indicated by a prop-
erty’s earning power, based on the capitalization of income.
Traditionally, specific appraisal techniques are applied within
the three approaches to derive indications of real property value. One
or more approaches to value may be used depending on which ap-
proaches are necessary to produce credible assignment results, given
the intended use.
The three approaches are interrelated.1 Each requires the gather-
ing and analysis of data that pertains to the property being appraised.
Each approach is outlined briefly in this chapter and discussed in detail
in subsequent sections of this book. From the approaches applied, the
appraiser develops separate indications of value for the property being
appraised. To complete the valuation process, the appraiser integrates
the information drawn from market research, data analysis, and the
application of the approaches to reach a value conclusion. This con-
clusion may be presented as a single point estimate of value or, if the

1. The sales comparison approach was once known as the “market approach.” However, this is a misnomer because all three
approaches to value are “market” approaches in that they rely on market data.

36 The Appraisal of Real Estate

assignment permits, as a range within which the value may fall (or as a
point referenced from a benchmark). An effective integration of all the
elements in the process depends on the appraiser’s skill, experience,
and judgment.
The components of the valuation process are shown in Figure 4.1.

Figure 4.1 The Valuation Process

Identification of the Problem

Identify Identify the Identify the purpose Identify the Identify the relevant Assignment
client and intended use of the assignment effective date characteristics conditions
intended users (type and definition of the opinion of the property
of value)

Scope of Work Determination

Data Collection and Property Description

Market Area Data Subject Property Data Comparable Property Data
General characteristics of Subject characteristics of Sales, listings, offerings
region, city, and neighborhood land use and improvements, vacancies, cost and depreciation,
personal property, business income and expenses,
assets, etc. capitalization rates, etc.

Data Analysis
Market Analysis Highest and Best Use Analysis
Demand studies Land as though vacant
Supply studies Ideal improvement
Marketability studies Property as improved

Land Value Opinion

Application of the Approaches to Value

Sales Comparison Approach Income Capitalization Approach Cost Approach

Reconciliation of Value Indications and Final Opinion of Value

Report of Defined Value

The Valuation Process 37

 Identification of the Appraisal Problem
The first step in the valuation process is the development of a clear
understanding of the problem to be solved. This sets the parameters
for the assignment. To solve any problem, the problem must first be
identified, and only then can the appropriate solution to the problem
be determined. In appraisal practice, problem identification logically
precedes scope of work determination.
Identification of the appraisal problem involves identifying each of
the following:
• client
• intended users, if any, in addition to the client
• intended use of the appraisal
• type of value and its definition
• effective date of the opinions and conclusions
• identification of the characteristics of the property that are relevant
to the type and definition of value and intended use of the appraisal
(including its location, the property rights to be valued, and other
features)
• assignment conditions, including extraordinary assumptions, hy-
pothetical conditions, and additional requirements to be followed
Before identifying the characteristics of the property and any ex-
traordinary assumptions and hypothetical conditions that are relevant
to the purpose of the assignment, the appraiser must clearly identify the
client, intended users, and intended use of the appraisal, the purpose
of the assignment, and the effective date of the opinion of value. Once
the appraisal problem has been identified, the appraiser can determine
the appropriate scope of work for the assignment.

Scope of Work Determination

Scope of work is the most critical decision an appraiser will make in
performing an assignment. (The topic is discussed in more detail in
Chapter 9.) Solving an appraisal problem involves three steps:
1. Identifying the problem
2. Determining the solution (or scope of work)
3. Applying the solution
None of the three steps can be omitted, and each must be performed
in order.
To analyze the problem, the appraiser identifies seven key assign-
ment elements: (1) client, (2) intended users in addition to the client,
(3) intended use, (4) objective of the appraisal, or type of value and its
definition, (5) effective date, (6) property characteristics that are relevant
to the assignment such as the interest to be valued and physical and
legal characteristics), and (7) assignment conditions such as hypotheti-

38 The Appraisal of Real Estate

cal conditions, extraordinary assumptions, and other
requirements. These elements provide the framework It is important that apprais-
ers fully understand the
for the assignment and allow the appraiser to identify
importance of determining
the problem to be solved. the scope of work. More infor-
The second step is to determine the scope of work mation on scope of work can
to solve the problem. Scope of work encompasses all be found in the handbook
aspects of the valuation process, including which ap- Scope of Work published by
the Appraisal Institute.
proaches to value will be used; how much data is to be
gathered, from what sources, from which geographic
area, and over what time period; the extent of the data
verification process; and the extent of property inspection, if any.
The scope of work decision is appropriate when it allows the ap-
praiser to arrive at credible assignment results and is consistent with
the expectations of similar clients and the work that would be performed
by the appraiser’s peers in a similar situation.

Planning the Appraisal

To complete an assignment efficiently, each step in the valuation process
should be planned and scheduled. Time and personnel requirements
will vary with the amount and complexity of the work. Some assign-
ments may be completed in a few days. For more complex appraisal
problems, weeks or months may be spent gathering, analyzing, and
applying all pertinent data.
Some assignments can be performed by a single appraiser, while
others require the assistance of other staff members or appraisal spe-
cialists. Sometimes the assistance of specialists in other fields is needed.
For example, in valuing a hotel property, the appraiser’s findings may
be augmented by the professional opinion of a personal property ap-
praiser. Recognizing when work can or must be delegated improves
efficiency and enhances accuracy, but appraisers should also be aware

Scope Creep
The recently coined term scope creep generally refers to a shift in the focus or parameters of a given project
or role, often resulting in more work at little or no additional compensation for the provider of the service.
Examples include the increasing number of photographs required in many appraisal assignments and
increasing institutional reporting requirements such as the recent implementation of the Market Conditions
Addendum to the Appraisal Report (Form 1004MC) by Fannie Mae. Granted, digital cameras have made the
chore of documenting a property with photographs less onerous than it used to be, but the client’s increased
expectation of how many photographs are necessary might not correlate with an increase in appraisal fees.
The best defense against scope creep within an assignment is a discussion of the client’s expectations
up front and a clear statement of the anticipated scope of work in the engagement letter or some other
preliminary written agreement. For example, in some cases the client might assume that the appraiser would
willingly testify at a property tax hearing for no additional compensation, reasoning that the testimony is
simply reporting the conclusions of the appraisal to another intended user. It might be advisable for the
appraiser and the client to reach an agreement up front that the appraisal will be performed for a set fee,
and potential testimony at a hearing would entail a separate assignment with its own scope of work to be
determined at the appropriate time if necessary.
See also Robin L. Phillips, “Scope Creep,” Valuation (First Quarter 2011): 20-25.

The Valuation Process 39

 of the responsibilities inherent in the use of reports prepared by oth-
ers. (These types of concerns are addressed in the Appraisal Institute’s
Guide Note 4 and Standards Rule 2-3 of the Uniform Standards of Pro-
fessional Appraisal Practice.) The appraiser or appraisers signing the
certification bear the ultimate responsibility for the assignment. That
is, any appraiser who signs any portion of an appraisal report must
sign the certification. With a comprehensive view of the assignment,
the appraiser can recognize the type and volume of work to be done
and schedule and delegate that work properly.
The appraiser’s work plan usually includes an outline of the pro-
posed appraisal report. The major parts of the report are delineated,
and the data and procedures involved in each section are noted. Using
this outline, data can be assembled intelligently and the appropriate
amount of time can be allocated to each step in the valuation process.

Data Collection and Property Description

Following the preliminary analysis (i.e., the identification of the ap-
praisal problem and determination of the scope of work), the appraiser
gathers data on the market area, the subject property, and comparable
properties in the market. The data needed by appraisers can be divided
into general data and specific data.
General data includes information about trends in the social, eco-
nomic, governmental, and environmental forces that affect property
value in the defined market area. A trend is a momentum or tendency
in a general direction brought about by a series of interrelated changes.
Trends such as population shifts, declining office building occupancy
rates, and increased housing starts in a market area are identified by
analyzing general data. General data can contribute significantly to an
appraiser’s understanding of the marketplace.
Specific data relates to the property being appraised and to compa-
rable properties. This data includes legal, physical, locational, cost, and
income and expense information about the properties and the details
of comparable sales. Financial arrangements that could affect selling
prices are also considered.
Data on comparable properties can be either general data that an
appraiser has on file or specific data that must be gathered for a particu-
lar assignment. More often, comparable property data is specific supply
and demand data that relates to the competitive position of properties
similar to the subject. Supply data includes inventories of existing and
proposed competitive properties, vacancy rates, and absorption rates.
Demand data may consist of population, income, employment, and
survey data pertaining to potential property users. From this data an
estimate of future demand for the present or prospective use or uses of
the subject property is developed.
The amount and type of data collected for an appraisal depend on
the approaches used to develop an opinion of value and on the defined
scope of work. In a given valuation assignment, more than one approach

40 The Appraisal of Real Estate

to value is often appropriate and necessary to arrive at a value opinion.
Depending on the problem or problems to be addressed, one approach
may be given greater emphasis in deriving the final opinion of value.
In conducting a particular assignment, the appraiser’s judgment and
experience and the quantity and quality of data available for analysis
may determine which approach or approaches are used.
The data collected should be meaningful and relevant. All perti-
nent value influences, facts, and conclusions about trends should be
clearly indicated in the report and related specifically to the property
being appraised. Because the data selected forms the basis for the ap-
praiser’s judgments, a thorough explanation of the significance of the
data reported ensures that the reader will understand these judgments.
Irrelevant data should be excluded because the inclusion of that data
may detract from the credibility of the appraiser’s analyses and conclu-
sions. Data on prior sales of the subject property is almost always rel-
evant. It is not sufficient to simply report the subject’s sales history. When
an opinion of market value is to be developed, professional standards
require that the appraiser analyze all sales of the subject property that
occurred in the three years prior to the date of value. Any agreements
of sale (e.g., contracts), options, or listings that are current as of the
date of appraisal and available in the normal course of business must
also be analyzed. Listing the sales or other agreements is just a start.
Declining markets prove a challenge. In the 2013 market, analyzing
sales of the subject property that occurred within the previous three
years was difficult. Many agricultural, residential, industrial, and office
properties went through the foreclosure process, and the titles to these
properties were transferred to banks and other lenders. Information on
the details of these transactions was often not available.

Data Analysis
Once the appropriate data on the market area, subject property, and site
has been collected and reviewed for accuracy, the appraiser begins the
process of data analysis, which has two components: market analysis
and highest and best use analysis. Even the simplest valuation assign-
ments must be based on a solid understanding of prevalent market
conditions and the highest and best use of the real estate. The two forms
of analysis are related. In fact, an appraiser’s investigation into trends
affecting the economic base of the market area leads directly into the
determination of highest and best use.

Market Analysis
Market analysis is a study of market conditions for a specific type of
property. A description of prevalent market conditions helps the reader
of an appraisal report understand the motivations of participants in the
market for the subject property. Broad market conditions provide the
background for local and neighborhood market influences that have
direct bearing on the value of the subject property.

The Valuation Process 41

 Market analysis, which is discussed in detail in
Analyses of market condi- Chapter 15, serves two important functions. First, it pro-
tions and highest and
vides a background against which local developments
best use are crucial to the
valuation process when a are considered. Second, a knowledge of the broad
market value opinion is the changes that affect supply and demand gives an ap-
objective of the assignment. praiser an indication of how values change over time.
The data and conclusions generated through mar-
ket analysis are essential components in other portions
of the valuation process. In fact, most of the time and effort involved in
the valuation process are devoted to market analysis, which includes
collecting, verifying, and analyzing data.
Market analysis yields information needed for each of the three tradi-
tional approaches to value. In the cost approach, market analysis provides
the basis for adjusting the cost of the subject property for depreciation, i.e.,
physical deterioration and functional and external obsolescence. In the
income capitalization approach, all the necessary income, expense, and
rate data is evaluated in light of the market forces of supply and demand.
In the sales comparison approach, the conclusions of market analysis are
used to delineate the market and thereby identify comparable properties.
The extent of market analysis and the level of detail appropriate
for a particular assignment depend on the appraisal problem under
examination. Appraisers who are doing business in a generally stable
market on a daily basis should have all the necessary demographic and
economic information to document market conditions on file. When
the appraisal assignment is complex—e.g., an analysis of the feasibility
of a subdivision development—a more detailed market analysis will be
required. Regardless of the assignment’s complexity, the logic of the
market analysis should be communicated clearly to the reader in the
appraisal report. The level of detail may depend on the needs of the
client and other intended users and on the intended use of the report.

Highest and Best Use Analysis

Whenever a market value opinion is developed, highest and best use
analysis is necessary. Through highest and best use analysis, the ap-
praiser interprets the market forces that affect the subject property and
identifies the use or uses on which the final opinion of value is based.
(Highest and best use analysis is discussed in detail in Chapter 16.)
Although highest and best use analysis is an essential part of the
valuation process, it is often one of the weakest areas in an appraisal.
It is too often viewed as a necessary but fruitless exercise, when it is
really the heart of the assignment in an analysis of market value. If
highest and best use is not adequately addressed, the appraiser may
inappropriately analyze the property being appraised.
When the assignment objective is to develop an opinion of market
value, the appraiser must address the question of the highest and best
use for whatever is being valued. In valuing an improved property, the
appraiser must address the question of the highest and best use as cur-
rently improved. In valuing a vacant site, the appraiser must address

42 The Appraisal of Real Estate

highest and best use as though vacant. In valuing a site as if vacant (for
example, in applying the cost approach to an improved property), the ap-
praiser must address the question of the highest and best use as if vacant.
Analyzing the highest and best use of the land as though vacant helps
the appraiser identify comparable properties. Whenever possible, the
property being appraised should be compared with similar properties
that have been sold recently in the same market. Potentially comparable
properties that do not have the same highest and best use are usually elimi-
nated from further analysis. Estimating the land’s highest and best use as
though vacant is a necessary part of deriving an opinion of land value.
There are two reasons to analyze the highest and best use of the
property as improved. The first is to help identify potentially comparable
properties. Each improved property should have the same or a similar
highest and best use as the improved subject property, both as though
vacant and as improved. The second reason to analyze the highest and
best use of the property as improved is to decide which of the following
options should be pursued:
• Maintain the improvements as is.
• Cure items of deferred maintenance and retain the improvements.
• Modify the improvements (e.g., renovate, modernize, or convert).
• Demolish the improvements.
In some situations, a property may be subject to restrictions (e.g., historic
preservation) that prevent the improvements from being demolished.
In this case, the highest and best use is limited by the restriction.
The highest and best use conclusion should specify the optimal use (or
uses), when the property will be put to this use or achieve stabilized occu-
pancy, and who would be the most likely purchaser or user of the property
(e.g., an owner-operator of the property or an equity or debt investor).

Land Value Opinion

Land value can be a major component of total property value. Apprais-
ers often develop an opinion of land value separately, even when valu-
ing properties with extensive building improvements. Land value and
building value may change at different rates because improvements are
almost always subject to depreciation. For many appraisals, a separate
opinion of land value is required.
Although a total property value estimate may be derived in the sales
comparison or income capitalization approach without separating land and
improvement values, it may be necessary to estimate land value separately
to isolate the value the land contributes to the total property. In the cost
approach, the value of the land must be estimated and stated separately.
Developing an opinion of land value can be considered a separate
step in the valuation model or an essential technique for applying certain
approaches to value, depending on the defined appraisal problem and
on the highest and best use analysis. The relationship between highest

The Valuation Process 43

 and best use and land value2 may indicate whether
Of the various techniques that an existing use is the highest and best use of the land.
can be applied to estimate
Typically, land valuation is performed as part of a
land value, sales comparison
is usually the most reliable. cost approach analysis, but if the cost approach is not
applied in the assignment, it is possible to develop a
well-supported appraisal without a separate land value
conclusion. As one example, a land value conclusion
is not required in the appraisal of one condominium unit in a large
residential condominium project.
An appraiser can use several techniques to obtain an indication of
land value:
• sales comparison
• extraction
• allocation
• subdivision development
• land residual
• ground rent capitalization
Usually the most reliable way to estimate land value is by sales com-
parison. When few sales are available, however, or when the value
indications produced through sales comparison need additional sup-
port, procedures like extraction or allocation may be applied. The other
methods of land valuation, which all involve income capitalization
techniques, are subject to more limitations and are used less often in
everyday appraisal practice. The subdivision development technique is
a specialized valuation method useful in specific land use situations.3
The land residual technique is used more often in highest and best
use analysis to test the feasibility of various uses than to estimate land
value as part of one of the traditional approaches to value. Ground rent
capitalization can be used when land rents and land capitalization rates
are readily available—e.g., for appraisals in well-developed areas. (These
land valuation techniques are discussed in detail in Chapter 17.)

Application of the Approaches to Value

The valuation process is applied to develop a well-supported opinion of
a defined value based on an analysis of pertinent general and specific
data. Appraisers develop an opinion of property value with specific ap-
praisal procedures that reflect three distinct methods of data analysis:
• sales comparison approach
• income capitalization approach
• cost approach

2. Appraisers distinguish between land (the earth’s surface, both land and water, and anything that is attached to it, whether
by the course of nature or by human hands) and a site (land that is improved so that it is ready to be used for a specific
purpose). The distinctions between the two terms are discussed more fully in Chapter 12.
3. The valuation of subdivisions is discussed more fully in Don M. Emerson, Jr., Subdivision Valuation (Chicago: Appraisal
Institute, 2008).

44 The Appraisal of Real Estate

One or more of these approaches are used in all estima-
tions of value. The approaches employed depend on the One of the three approaches
to value—sales comparison,
type of property, the intended use of the appraisal, the
income capitalization, and
applicable scope of work, and the quality and quantity cost—may be especially
of data available for analysis. effective in a given situation.
All three approaches are applicable to many ap- An appraiser often employs
praisal problems, but one or more of the approaches more than one approach.
may have greater significance in a given assignment.
For example, the sales comparison approach is usually
emphasized in the valuation of single-unit residential
properties. However, this approach may not be applicable to special-
ized properties such as garbage disposal plants because comparable
data may not be available. The income capitalization approach is used
to value most income-producing properties, but it can be particularly
unreliable in the market for commercial or industrial property where
owner-occupants outbid investors. The income capitalization approach
is not typically applied in valuing homes. The cost approach may be
more applicable to new and special-purpose properties and less ap-
plicable in valuing properties with older improvements that suffer
substantial depreciation, which can be difficult to estimate. Appraisers
should apply all the approaches that are applicable and for which there
is data. The alternative value indications derived can either support or
refute one another.

Sales Comparison Approach

The sales comparison approach is most useful when a number of simi-
lar properties have recently been sold or are currently for sale in the
subject property’s market. Using this approach, an appraiser produces
a value indication by comparing the subject property with similar (i.e.,
comparable) properties. The sale prices of the properties that are judged
to be most comparable tend to indicate a range in which the value in-
dication for the subject property will fall.
The appraiser estimates the degree of similarity or difference be-
tween the subject property and the comparable sales by considering
various elements of comparison:
• real property rights conveyed
• financing terms
• conditions of sale
• expenditures made immediately after purchase
• market conditions
• location
• physical characteristics
• economic characteristics
• legal characteristics
• non-realty components of value

The Valuation Process 45

 Dollar or percentage adjustments are then applied to the known sale
price of each comparable property to derive an indicated value for the
subject property. Qualitative analysis techniques may also be applied for
elements of comparison for which quantitative adjustments cannot be
developed. Through this comparative procedure, the appraiser renders
an opinion of the value that was defined in the problem identification
as of a specific date.
The sales comparison approach can provide an indication of value
for fee simple, leased fee, or leasehold interests, depending on what real
property rights are represented in the sales of comparable properties.
Income multipliers and capitalization rates may also be extracted
through analysis of comparable sales, though these factors are not re-
garded as elements of comparison in the sales comparison approach.
Instead, they should be applied in the income capitalization approach.

Income Capitalization Approach

In the income capitalization approach, the present value of the antici-
pated future benefits of property ownership is measured. A property’s
income and resale value upon reversion may be capitalized into a cur-
rent, lump-sum value. There are two methods of income capitalization:
direct capitalization and yield capitalization. In direct capitalization, the
relationship between one year’s income and value is reflected in either
a capitalization rate or an income multiplier. In yield capitalization,
several years’ forecast income and a reversionary value at the end of a
designated period are converted to present value using a yield rate. The
most common application of yield capitalization is discounted cash flow
analysis. Given the significant differences in how and when properties
generate income, there are many variations in both direct and yield
capitalization procedures, which are addressed in Chapter 20.
Like the sales comparison and cost approaches, the income capi-
talization approach requires extensive market research. Data collection
and analysis for this approach are conducted against a background of
supply and demand relationships, which provide information about
trends and market anticipation.
The specific data that an appraiser investigates in the income capital-
ization approach might include the property’s gross income expectancy,
the expected reduction in gross income caused by vacancy and collection
loss, the anticipated annual operating expenses, the pattern and dura-
tion of the property’s income stream, and the anticipated reversionary
value. After income and expenses are estimated, the income streams
are capitalized by applying an appropriate rate or factor or converted
into present value through discounting. In discounted cash flow analy-
sis, the quantity, variability, timing, and duration of a set of periodic
incomes and the quantity and timing of the reversion are specified and
discounted to a present value at a specified yield rate. The rates used
for capitalization or discounting are derived from acceptable rates of
return for similar properties.

46 The Appraisal of Real Estate

 Like the other approaches to value, the income capitalization ap-
proach is applicable in the valuation of various property interests. Real
property that produces income in the form of rent is usually leased, which
creates legal estates of the ownership interests of the lessor and lessee (i.e.,
the leasehold and leased fee interests). The valuation of the fee simple
interest of leased property, which is not an uncommon appraisal assign-
ment, may or may not require the valuation of the individual interests.

Cost Approach
The cost approach is based on the understanding that market partici-
pants relate value to cost. In the cost approach, the value of a property is
derived by adding the estimated value of the land to the current cost of
constructing a reproduction or replacement for the improvements and
then subtracting the amount of depreciation (i.e., deterioration and ob-
solescence) in the structures from all causes. Entrepreneurial incentive
(the amount to developer expects to receive) or entrepreneurial profit (the
amount actually received) may be included in the value indication. This
approach is particularly useful in valuing new or nearly new improve-
ments and properties that are not frequently exchanged in the market.
Cost approach techniques can also be employed to derive information
needed in the sales comparison and income capitalization approaches
to value, such as the costs to cure items of deferred maintenance.
The current costs to construct the improvements can be obtained
from cost estimators, cost manuals, builders, and contractors. Deprecia-
tion is measured through market research and the application of specific
procedures. Land value is estimated separately in the
cost approach.
Typically the cost approach provides an indication
reconciliation
of the value of the fee simple interest. The value indi-
The last phase of any valu-
cation may need to be adjusted accordingly if a leased ation assignment in which
fee or other partial interest is being valued. two or more value indica-
tions derived from market
data are resolved into a final
Final Reconciliation of Value Indications value opinion, which may be
The final analytical step in the valuation process is either a final range of value
the reconciliation of the value indications derived or a single point estimate.
Professional standards typi-
into a value conclusion. Reconciliation occurs within cally require the appraiser to
each approach to value, but the final reconciliation consider both the quantity
occurs at the end of the valuation process. The value and quality of available data
conclusion can be expressed as a single number, as in reconciliation.
a range of numbers, or as a number greater than or final opinion of value
less than a specified, benchmark amount. The nature The opinion of value derived
of reconciliation depends on the appraisal problem, from the reconciliation of
the approaches that have been used, and the reliability value indications and stated
and adequacy of the data used. in the appraisal report; may
be expressed as a single
When all three approaches have been used, the point, as a range, or in rela-
appraiser examines the three separate indications and tion to a benchmark.
considers the relative dependability and applicability of

The Valuation Process 47

 each approach. In the reconciliation section of the report, the appraiser
can explain variations among the indications produced by the different
approaches and account for differences between the value conclusions
and methods applied.

Report of Defined Value

An appraisal report is the tangible expression of the appraiser’s work.
The preparation and delivery of the appraisal report is generally the
last step in the valuation process. The report may be communicated to
the client in writing or orally. Chapter 31 describes the requirements
for appraisal reports and the circumstances under which they are pre-
pared and submitted.
The report of the value opinion, which is the last step in the valu-
ation process, addresses the data analyzed, the methods applied, and
the reasoning that led to the value conclusion.

48 The Appraisal of Real Estate