Washington Real Estate Fundamentals
Lesson 12:
Real Estate Appraisal
© 2011 Rockwell Publishing
Appraisal Basics
Appraisal: Estimate or opinion of a property’s
value, made by professional appraiser and
set forth in written appraisal report.
 Sometimes called a valuation.
 Not a scientific conclusion.
 Competent appraisers may disagree
about a property’s value.
© 2011 Rockwell Publishing
Appraisal Basics
How appraisals are used
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Seller sometimes obtains appraisal before
listing property, to help set price.
Buyer sometimes obtains appraisal to find
out how much to offer.
Most often, buyer’s lender orders appraisal.
 Uses appraisal to determine if property is
adequate security for proposed loan.
 Maximum loan amount tied to property’s
value.
© 2011 Rockwell Publishing
Appraisal Basics
How appraisals are used
In each of these cases, seller, buyer, or
buyer’s lender would hire fee appraiser.
 Fee appraiser: Independent appraiser hired
to value particular property for a fee.
 Most appraisers are fee appraisers.
 May be self-employed or work for
appraisal firm.
© 2011 Rockwell Publishing
Appraisal Basics
How appraisals are used
Other functions of real estate appraisals:
 property management (setting rental rates)
 land development (highest and best use)
 property tax assessments
 probate of estates
 corporate mergers and acquisitions
 bankruptcies
 condemnation proceedings
© 2011 Rockwell Publishing
Appraisal Basics
Appraiser/client relationship
Whoever hires appraiser is the client.
 Appraiser is client’s agent.

Example: Lender orders independent
appraisal for buyer’s loan application.
 Lender,
not buyer, is appraiser’s client.
 Appraiser
is lender’s agent, owes
fiduciary duties to lender.
© 2011 Rockwell Publishing
Appraisal Basics
Appraiser’s fee
Appraiser’s fee set in advance, based on:
 expected difficulty of assignment
 how much time it’s likely to take
Fee can’t be:
 percentage of appraised value
 based on client’s satisfaction with results
© 2011 Rockwell Publishing
Appraisal Basics
Appraiser independence rules
In most home loan transactions, mortgage
loan originator (MLO) barred from substantive
communication with appraiser.
 MLO must arrange for appraisal through:
 appraisal management company
 separate department in lender’s
organization

Also, real estate agent may not select or
compensate appraiser.
© 2011 Rockwell Publishing
Appraisal Basics
Appraiser independence rules
Under federal and state law, illegal for anyone
with interest in transaction to attempt to
improperly influence appraiser.
 Coercion, extortion, bribery.
Not illegal to ask appraiser to:
 consider additional property information
 explain basis of value estimate more fully
 correct errors in appraisal report
© 2011 Rockwell Publishing
Appraisal Basics
State licensing and certification
In Washington, all appraisers must be statecertified, state-licensed, or registered trainees.
For federally related loans (most real estate
loans), appraisal must be prepared:
 by state-certified or state-licensed appraiser
 in accordance with Uniform Standards of
Profession Appraisal Practice (USPAP)

Exemption: transactions of $250,000 or
less
© 2011 Rockwell Publishing
Summary
Appraisal Basics
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Appraisal
Fee appraiser
Federally related loan
Mortgage loan originator (MLO)
State-certified appraiser
State-licensed appraiser
Registered appraiser trainee
Uniform Standards of Professional
Appraisal Practice (USPAP)
© 2011 Rockwell Publishing
Value
Value: Present worth of future benefits of
property ownership.
 Usually measured in terms of money.
© 2011 Rockwell Publishing
Value
Types of value
Value in use: How much a property is worth
to a particular person.
 Also called subjective value, utility value.
Value in exchange: How much a property is
worth to the average person who might buy it.
 Also called objective value.
 Most commonly called market value.
© 2011 Rockwell Publishing
Market Value
Elements of value
To have market value, an item must have
four characteristics:
 utility
 scarcity
 transferability
 demand
These are sometimes called the elements of
value.
© 2011 Rockwell Publishing
Market Value
Definition
“The most probable price which a property
should bring in a competitive and open market
under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and
knowledgeably, and assuming the price is not
affected by undue stimulus.”
Most probable price, not highest price.
 Price property should bring, not will bring.
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© 2011 Rockwell Publishing
Market Value
Market value vs. price
Thus, market value is the price that should be
paid under all conditions requisite to a fair sale:
 competitive and open market
 prudent, informed, and unrelated parties
 no undue stimulus (unusual pressure to
buy or sell)
In contrast, market price (or sales price) is the
price actually paid, regardless of the conditions
of sale.
© 2011 Rockwell Publishing
Summary
Value
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Value
Value in use
Value in exchange
Market value
Elements of value
Conditions requisite to a fair sale
© 2011 Rockwell Publishing
Value
Principles of value
Value is created and changed by major forces:
 social ideals and standards
 economic fluctuations
 government regulations
Principles of value: Body of precepts that take
these forces into account and guide appraiser
during valuation process.
 Apply no matter which method of
appraisal the appraiser is using.
© 2011 Rockwell Publishing
Value
Principles of value
Highest and best use
 Change
 Anticipation
 Supply and demand
 Substitution
 Conformity
 Progression and regression
 Contribution
 Competition

© 2011 Rockwell Publishing
Principles of Value
Principle of highest and best use
Highest and best use: Use of the property
that would bring owner greatest net return.
 Important in appraisal of incomeproducing property.
 Highest and best use must be a legal
use; can’t violate zoning or CC&Rs.
© 2011 Rockwell Publishing
Principles of Value
Principle of change
Principle of change: A property’s value will
increase or decrease over time.
 Changes in value occur:
 in response to external forces
 as the property itself improves or
deteriorates

Therefore appraisal always tied to
specific point in time: effective date.
© 2011 Rockwell Publishing
Principles of Value
Principle of change
Property’s four-phase life cycle:
 integration
 equilibrium
 disintegration
 rejuvenation
Property’s value depends on where it is
in its life cycle.
© 2011 Rockwell Publishing
Principles of Value
Principle of change
Property has:
 physical life cycle
 economic life cycle
Economic life usually ends first.
 Improvements become obsolete before
they actually fall apart.
© 2011 Rockwell Publishing
Principles of Value
Principle of anticipation
Principle of anticipation: Anticipated future
benefits of owning a property affect its value.
 If property’s value expected to increase
in future, that anticipation increases its
current value.
 If property’s value expected to decrease,
that anticipation decreases current value.
© 2011 Rockwell Publishing
Principles of Value
Principle of supply and demand
Principle of supply and demand:
 If demand for a product exceeds
available supply, value will increase.
 If supply exceeds demand, value will
decrease.
© 2011 Rockwell Publishing
Principles of Value
Principle of supply and demand
In real estate context, if demand for housing
in a location increases, prices will rise.
 Developers will respond to increased
demand by building more houses.
 As supply increases, demand will be met
and prices will fall.
© 2011 Rockwell Publishing
Principles of Value
Principle of substitution
Principle of substitution: Property’s value
limited by cost of obtaining equally desirable
substitute, if substitute can be obtained
without undue delay.
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If two equally desirable properties
available, the one that costs less will be
purchased first.
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Principle is theoretical basis for all three
methods of appraisal (discussed later).
© 2011 Rockwell Publishing
Principles of Value
Principle of conformity
Principle of conformity: Maximum value of
land is achieved when there is an acceptable
degree of social and economic conformity in
the area.
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Homes should be roughly similar in age,
size, style, and quality.

Great disparity within a neighborhood
may decrease values.
© 2011 Rockwell Publishing
Principles of Value
Progression and regression
Value of a property is affected by value of
surrounding properties.
 Principle of progression: Inexpensive
home more valuable in neighborhood of
expensive homes than it would be in
neighborhood of similar homes.
 Principle of regression: Expensive home
less valuable in neighborhood of smaller
or rundown homes.
© 2011 Rockwell Publishing
Principles of Value
Principle of contribution
Principle of contribution: An improvement may
contribute more or less to the property’s value
than the improvement cost to make.
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Example: Finished basement
 Construction cost: $7,000
 Contribution to value of home: $2,000
© 2011 Rockwell Publishing
Principles of Value
Principle of competition
Principle of competition: Value of property,
especially income-producing property, is
affected by competing properties.
 Example: Income from (and therefore
value of) gas station reduced if second
gas station built across the street.
© 2011 Rockwell Publishing
Summary
Principles of Value
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Highest and best use
Change
Anticipation
Supply and demand
Substitution
Conformity
Progression and regression
Contribution
Competition
© 2011 Rockwell Publishing
The Appraisal Process
7 Steps
1.
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6.
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8.
Define problem.
Determine the scope of work.
Collect and verify the data.
Analyze the data.
Determine site value.
Apply the approaches to value.
Reconcile value indicators for estimate.
Issue appraisal report.
© 2011 Rockwell Publishing
The Appraisal Process
Step 1: Define the problem
To define problem, appraiser must:
 identify subject property
 determine function of appraisal
© 2011 Rockwell Publishing
The Appraisal Process
Step 2: Determine scope of work
Appraiser must figure out what work is
needed to solve the appraisal problem.
 Together, defining appraisal problem
and determining scope of work called
preliminary analysis.
© 2011 Rockwell Publishing
The Appraisal Process
Step 3: Collect and verify data
Appraiser decides what data is needed
based on:
 type of property
 function of appraisal
Two main categories of data:
 general
 specific
© 2011 Rockwell Publishing
The Appraisal Process
Step 3: Collect and verify data
General data: Information pertinent to subject
property’s value that does not concern the
property itself.
Population trends
 Economic conditions
 Condition and quality of neighborhood
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© 2011 Rockwell Publishing
The Appraisal Process
Step 3: Collect and verify data
Specific data: Data concerning subject
property itself.
 To collect specific data, appraiser
performs:
 site analysis
 building analysis
© 2011 Rockwell Publishing
The Appraisal Process
Step 4: Analyze the data
Data analysis occurs throughout appraisal
process.
Appraiser asks:
 How relevant is data?
 How reliable is data?
© 2011 Rockwell Publishing
The Appraisal Process
Step 6: Apply approaches to value
Appraiser chooses appropriate valuation
method(s), given type of property being
appraised.
 Three methods of appraisal:
 sales comparison approach
 cost approach
 income approach

For particular assignment, may use only
one method, or two, or all three.
© 2011 Rockwell Publishing
The Appraisal Process
Step 7: Reconciliation
Value indicator: Estimate of what subject
property is worth based on application of a
single valuation method.
 Each method applied results in a
different value indicator.
 Value indicators must be reconciled to
arrive at final value estimate.
 Appraiser puts most emphasis on
approach best suited to type of property.
© 2011 Rockwell Publishing
The Appraisal Process
Step 8: Issue appraisal report
Final step is to prepare appraisal report and
present report to client.

Appraisal report gives:
 final value estimate
 explains how estimate was reached
© 2011 Rockwell Publishing
Gathering Data
Now we’ll take a closer look at steps 3 and 4,
gathering and analyzing data.
Appraiser first gathers, verifies, and analyzes
general data:
 economic trends and conditions
(especially local conditions)
 neighborhood analysis
© 2011 Rockwell Publishing
General Data
Economic-base analysis
Economic-base analysis: Projecting future
economic growth by looking at economic
activity in:
 basic industries (local economy’s
foundation), and
 non-basic (service) industries, which support
basic industries.
© 2011 Rockwell Publishing
General Data
Neighborhood analysis
Considerations in neighborhood analysis:
 percentage of home ownership
 vacant homes and lots, land use changes
 conformity of homes
 land contours and streets
 utilities and public services
 nuisances
 proximity to schools, employment, shopping
 prestige of area
 government influences: zoning, taxes
© 2011 Rockwell Publishing
Gathering Data
Specific data
Next, appraiser gathers, verifies, and
analyzes specific data, data about the subject
property itself:
site analysis (land and utilities)
 building analysis (improvements)
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© 2011 Rockwell Publishing
Specific Data
Site analysis
Objective of site analysis: to determine
property’s highest and best use.
Appraiser considers:
 lot size and shape (area, width, depth)
 frontage
 topography
 utilities
 site in relation to surrounding area
 other factors that affect use or title
© 2011 Rockwell Publishing
Site Analysis
Frontage
Frontage: Length of lot boundary that abuts
street, body of water, or some other amenity.
 Important consideration for:
 retail property
 residential property beside a lake or
other desirable feature
© 2011 Rockwell Publishing
Site Analysis
Plottage
Plottage: Increase in value that may occur
when two or more properties are combined
into single property.
 Single large lot often worth more than
sum of the values of the smaller lots that
were joined together.
 Plottage is a factor in industrial or
commercial development, where large
lots are often necessary.
© 2011 Rockwell Publishing
Site Analysis
Utilities
Appraiser considers availability and cost of
utility connections.
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For property in remote area, cost may be
prohibitive, decreasing property’s value.
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If septic system needed, soil must be
suitable.
 Percolation test: Measures how well
soil absorbs water, to determine
whether septic system can be used.
© 2011 Rockwell Publishing
Specific Data
Building analysis
Appraiser examining improvements considers:
 construction quality
 age and current condition of structures
 size of structures (square footage)
 interior layout
 number & size of rooms (bedrooms, baths)
 energy efficiency and equipment
 garage or carport, basement
 orientation of structures on site (views, etc.)
© 2011 Rockwell Publishing
Specific Data
Building analysis
Square footage refers to improved living area.
 Excludes garage, basement, porches.
Also, appraiser will not count square footage
of addition made without appropriate permits.
© 2011 Rockwell Publishing
Summary
The Appraisal Process
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8 steps in appraisal process
General data
Specific data
Value indicators
Reconciliation
Neighborhood analysis
Site analysis
Building analysis
© 2011 Rockwell Publishing
Approaches to Value
Again, three approaches to value:
sales comparison
 cost
 income
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All are methods of estimating market value.
 Which
method appraiser relies on most
depends on type of property in question.
© 2011 Rockwell Publishing
Approaches to Value
Sales comparison approach to value
Sales comparison approach: Uses recent
sales of similar properties in local market as
basis for estimate of subject property’s value.
 Also called market data approach.
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Application of principle of substitution:
 Buyers won’t pay more for subject than
market price for identical property.
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Best method for appraising single-family
homes, vacant land.
© 2011 Rockwell Publishing
Sales Comparison Approach
Comparable sales
Appraiser applying sales comparison method
must locate at least 3 comparable sales.
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Comparable sale: Property similar to the
subject property that was recently sold.
 Also called a comparable or a comp.
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Appraiser adjusts sales price of each
comparable to reflect differences
between it and subject property.
© 2011 Rockwell Publishing
Sales Comparison Approach
Primary elements of comparison
Appraiser decides whether a property would
be a good comparable using the primary
elements of comparison:
 date of sale
 location
 physical characteristics
 terms of sale
 conditions of sale
© 2011 Rockwell Publishing
Primary Elements of Comparison
Date of sale
Date of sale: Date buyer and seller agreed on
a price.
 Important because property values are
constantly changing.
© 2011 Rockwell Publishing
Primary Elements of Comparison
Date of sale
Appraiser should use most recent sales
available.
 In volatile market, sales should be from
last three months.
 In ordinary market, from last six months.
 In inactive market, may use older sales
and adjust for inflation, other trends.
 Must justify use of older sales in
report.
© 2011 Rockwell Publishing
Primary Elements of Comparison
Location
Location is the factor that has the greatest
impact on a property’s value.
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Appraiser looks for comparables in same
neighborhood as subject property.
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If necessary, may use sale of property in
comparable neighborhood.
© 2011 Rockwell Publishing
Primary Elements of Comparison
Physical characteristics
Comparables should be similar to subject
property in:
 architectural style
 construction quality
 overall condition
 features and amenities
Appraiser will make adjustments to account
for differences in physical characteristics.
© 2011 Rockwell Publishing
Primary Elements of Comparison
Terms of sale
A sale that involved seller financing or other
special terms generally isn’t a good
comparable.
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Buyer may have been willing to pay more
because of special financing terms.
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Difficult to judge effect on sales price.
Appraiser looks for comparables sold on
terms that are cash equivalent.
© 2011 Rockwell Publishing
Primary Elements of Comparison
Conditions of sale
To be used as a comparable, sale must have
taken place under normal conditions:
 parties were unrelated (“arm’s length
transaction”)
 buyer and seller acted prudently and
knowledgeably
 no unusual pressure on either party
 property was offered in a competitive and
open market for a reasonable time
© 2011 Rockwell Publishing
Sales Comparison Approach
Making adjustments
To take into account physical differences
between a comparable and the subject,
appraiser adjusts sales price of comparable.
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It’s always the comparable’s price, not
the subject’s value, that is adjusted.
© 2011 Rockwell Publishing
Sales Comparison Approach
Making adjustments
Subject property has a feature the comp lacks:
 value of feature added to comp’s sales
price
Subject property lacks a feature the comp has:
 value of feature subtracted from comp’s
sales price
© 2011 Rockwell Publishing
Sales Comparison Approach
Estimating subject property’s value
Appraiser estimates subject property’s value
based on adjusted prices of at least three
comparables.
 Never simply averages the adjusted
prices.
 More weight given to the comparable(s)
to which fewer adjustments were made.
© 2011 Rockwell Publishing
Summary
Sales Comparison Approach
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Sales comparison approach
Comparable
Primary elements of comparison
Date of sale
Location
Physical characteristics
Terms of sale
Conditions of sale
Making adjustments
© 2011 Rockwell Publishing
Approaches to Value
Cost approach to value
Cost approach: Bases estimate of subject
property’s value on how much it would cost to
build a replacement of the improvements.
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Also called summation method, because
it involves adding separate estimates of
the improvements and land together.
© 2011 Rockwell Publishing
Cost Approach to Value
Sets ceiling on value
Cost approach usually provides ceiling for
subject property’s value.
 Another application of principle of
substitution:
 Buyers won’t pay more for a used
property than the cost of building a
new property of equal desirability.
© 2011 Rockwell Publishing
Cost Approach to Value
3 Steps
Steps in cost approach:
1. Estimate cost of replacing improvements.
2. Estimate and deduct any depreciation.
3. Add value of land.
© 2011 Rockwell Publishing
Cost Approach to Value
Step 1: Estimating replacement cost
Replacement cost: Current cost of building
improvements with equivalent utility, using
modern materials and construction methods.
Reproduction cost: Current cost of building
exact replica, using materials and methods
identical to those originally used.

Replacement cost much better indicator
of property’s market value.
© 2011 Rockwell Publishing
Estimating Replacement Cost
3 Methods
1. Square-foot (comparative unit) method
 Easiest and most widely used.
 Square footage × Construction cost per sq. ft.
2. Unit-in-place method
 Estimate cost of replacing each building
component (roof, flooring, plumbing, etc.).
3. Quantity survey method
 Detailed, time-consuming estimate of
quantities and prices of materials and labor.
© 2011 Rockwell Publishing
Cost Approach to Value
Step 2: Deducting depreciation
Depreciation: Loss in value due to any cause.
Three categories of depreciation:
 physical deterioration
 functional obsolescence
 external obsolescence
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Categories of Depreciation
Physical deterioration
Physical deterioration: Loss in value due to
wear and tear, or damage.
 Easiest type of depreciation to identify
and measure.
 This type may be either curable or
incurable.
© 2011 Rockwell Publishing
Categories of Depreciation
Curable or incurable depreciation
Curable depreciation: Cost of correcting it can
be recovered in sales price when property sold.
Incurable depreciation: Can’t be corrected, or
cost would be too high.
 Physical
deterioration usually curable,
unless especially severe.
 Curable physical deterioration commonly
called deferred maintenance.
© 2011 Rockwell Publishing
Categories of Depreciation
Functional obsolescence
Functional obsolescence: Loss in value due to
functional inadequacies, often caused by age
or poor design.
 Examples: bad floor plan, too few bathrooms, outdated fixtures, unattractive style.
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May be curable or incurable.
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If problem is inside property lines and it’s not
physical deterioration, then it’s functional
obsolescence.
© 2011 Rockwell Publishing
Categories of Depreciation
External obsolescence
External obsolescence: Loss in value due to
factors outside of property itself. Also called
economic obsolescence.
 Examples:
 adverse
zoning changes
 undesirable neighborhood
 traffic congestion
 proximity to nuisance
 Always
incurable – outside owner’s control.
© 2011 Rockwell Publishing
Cost Approach to Value
Step 3: Adding land value
Final step in cost approach is to add value of
subject property’s lot or site to depreciated
replacement cost of improvements.

Value of land estimated by sales
comparison method.
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Land is not depreciated.
 To appraiser, land is indestructible and
does not lose value.
© 2011 Rockwell Publishing
Summary
Cost Approach
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Cost approach
Replacement cost
Reproduction cost
Depreciation
Physical deterioration
Deferred maintenance
Functional obsolescence
External obsolescence
Curable and incurable depreciation
© 2011 Rockwell Publishing
Approaches to Value
Income approach to value
Income approach: Uses the income that the
subject property generates to estimate its
value to potential investors.
 Also called capitalization method.
 Used to appraise income-producing
properties such as office buildings and
apartment buildings.
© 2011 Rockwell Publishing
Income Approach to Value
5 Steps
1. Calculate property’s potential gross
income.
2. Deduct bad debt and vacancy factor to
calculate effective gross income.
3. Subtract operating expenses to calculate
net income.
4. Select appropriate capitalization rate.
5. Capitalize property’s net income to
estimate its value.
© 2011 Rockwell Publishing
Income Approach to Value
1. Calculating potential gross income
Potential gross income: How much the
property would rent for in current rental market.
 Also called economic rent, in contrast to
contract rent.
 Contract rent: How much the property
currently rents for under an existing lease.
© 2011 Rockwell Publishing
Income Approach to Value
2. Calculating effective gross income
Effective gross income: Potential gross
income minus a vacancy factor.
Vacancy factor: Percentage deducted from
potential gross income to allow for unpaid
rents and vacancies.
 All units won’t be rented 100% of time.
 Tenants won’t always pay rent owed.
© 2011 Rockwell Publishing
Income Approach to Value
3. Calculating net operating income
Net operating income: Effective gross income
minus operating expenses.
Operating expenses: Costs associated with
operating income-producing property.
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Three main categories:
 fixed expenses
 maintenance expenses
 reserves for replacement
© 2011 Rockwell Publishing
Calculating Net Income
Operating expenses
Fixed expenses:
 property taxes
 hazard insurance
© 2011 Rockwell Publishing
Calculating Net Income
Operating expenses
Maintenance expenses:
 tenant services
 utilities
 supplies
 cleaning
 repairs
 administrative costs
 building employee wages
© 2011 Rockwell Publishing
Calculating Net Income
Operating expenses
Reserves for replacement: Funds set aside
for eventual replacement of structures and
equipment that will wear out.
© 2011 Rockwell Publishing
Calculating Net Income
Other expenses
Expenses connected with property ownership
that are not operating expenses for appraisal
purposes:
 mortgage payments (debt service)
 income tax paid on property’s earnings
 depreciation reserves
These are not deducted from effective gross
income in calculating net income.
© 2011 Rockwell Publishing
Income Approach to Value
4. Selecting a capitalization rate
Capitalization: Process of converting subject
property’s net income into estimate of value.

Expressed as mathematical formula:
Income ÷ Rate = Value
 Rate
in formula is capitalization rate.
 Represents desired rate of return for
investor (potential purchaser).
© 2011 Rockwell Publishing
Selecting a Capitalization Rate
Rate reflects investment risk
If property is risky investment, investors:
 require a greater return
 choose a higher capitalization rate
A higher capitalization rate translates into a
lower value for the property.
 In other words, investors would be willing
to pay less for the property.
© 2011 Rockwell Publishing
Selecting a Capitalization Rate
Selection methods
Appraisers have various methods for
selecting appropriate capitalization rate.

Example: Direct comparison method
 Appraiser analyzes recent sales of
comparable income properties to
determine their capitalization rates.
 Investors likely to want about the same
capitalization rate for subject property.
© 2011 Rockwell Publishing
Income Approach to Value
5. Capitalizing net income
Final step is to capitalize subject property’s
annual net income to arrive at estimate of
value.
 In other words, divide net income by
chosen capitalization rate to calculate
value estimate.
Income ÷ Rate = Value
© 2011 Rockwell Publishing
Income Approach to Value
Gross income multiplier method
Gross income multiplier method: Simplified
version of income approach for appraising
single-family home used as rental property.
 Also called gross rent multiplier method.
© 2011 Rockwell Publishing
Gross Income Multiplier Method
Comparable rental homes
Appraiser locates comparables: rental homes
similar to subject property that sold recently.
For each comparable, appraiser calculates a
gross income multiplier.
 Divides comparable’s sales price by its
rental income.
 May use either monthly or annual rent
(appraiser’s choice).
© 2011 Rockwell Publishing
Gross Income Multiplier Method
Using gross income multipliers
Next, appraiser uses gross income multipliers
of comparables to choose multiplier for
subject property.
Finally, appraiser multiplies chosen gross
income multiplier by subject property’s rent to
find its value.

If possible, appraiser should use
subject’s economic rent.
© 2011 Rockwell Publishing
Gross Income Multiplier Method
Rough estimate
Gross income multiplier method provides only
rough estimate of value.
 Based on gross income.
 Doesn’t take into account variation
between properties in operating costs
and vacancy rates.
© 2011 Rockwell Publishing
Reconciliation and Final Estimate
Reconciliation: Last step in appraisal process,
when appraiser assembles and interprets all
relevant data.
 Reconciles value indicators from the
different methods of appraisal applied.
 Gives greatest weight to most relevant
method for type of property.

Experience and judgment play critical role.
© 2011 Rockwell Publishing
Reconciliation and Final Estimate
Final estimate of value: Figure that best
represents appraiser’s expert opinion of
subject property’s value.

Appraiser presents final estimate of value
to client in appraisal report.
© 2011 Rockwell Publishing
Reconciliation and Final Estimate
Appraisal report

Form report: Uniform Residential Appraisal
Report form, used for most residential
appraisals.
 Presents only key data and conclusions.

Narrative report: For a more complicated
appraisal, report includes detailed
presentation of data and reasoning.
© 2011 Rockwell Publishing
Summary
Income Approach and Reconciliation
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Income approach
Potential gross income
Effective gross income
Net income
Operating expenses
Capitalization rate
Gross income multiplier method
Reconciliation
Final estimate of value
Appraisal report
© 2011 Rockwell Publishing