Cost Versus Market Value
There are three basic valuation approaches possible in a typical appraisal effort:
- The sales comparison or market approach utilizes sales of comparable properties to develop an opinion of value.
- The cost approach relies on replacement or reproduction costs to develop a value.
- The income approach to develops an opinion of value.
Cost can be defined as the total dollar amount to develop either a reproduction of an identical improvement or a replacement with a functional equivalent.
The definition of market value is the most probable price that a property should bring in when 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.
A basic tenant in appraisals is that cost does not equal value. Underlying this is the concept that a buyer (the market), may not recognize the dollar cost amount of an improvement on a property that is part of a real estate transaction. When appropriate, the development of an opinion of value will look at all three approaches to value and consider which best represents the true market value of the property.
The Steigerwaldt appraisal team are experts in determining the true market value of real estate. Contact us if you’d like to know and understand the value of your real estate.
-Richard Congdon, Valuation Operations Manager
