3.3 Valuation Approaches (Sales Comparison, Cost, Income) and BPOs

The Three Approaches to Value

Every appraisal considers up to three approaches. Which one dominates depends on the property type — a heavily tested decision point. The appraiser develops the approaches that are relevant and necessary, then reconciles. Not every approach applies to every property: a vacant church has no income, so the income approach is irrelevant.

Sales Comparison Approach (SCA)

The appraiser finds recent comparable sales ("comps"), then adjusts the comps — never the subject — to account for differences. The golden rule of adjustment direction:

• If the comp is superior to the subject (better feature), subtract from the comp's price.
• If the comp is inferior, add to the comp's price.

Mnemonic: CIA — Comp Inferior, Add (and the reverse, comp superior, subtract). You are answering: what would the comp have sold for if it were just like the subject?

Worked SCA Example

Subject has 3 bedrooms and a 2-car garage. A comp sold for $300,000 with 4 bedrooms (a $15,000 feature) and a 1-car garage (the second bay is worth $8,000).

• Comp has an extra bedroom (superior) → subtract $15,000.
• Comp lacks one garage bay (inferior) → add $8,000.

Adjusted comp value = $300,000 − $15,000 + $8,000 = $293,000. With several comps adjusted this way, the appraiser reconciles to one indicated value, weighting the comp needing the fewest and smallest adjustments most.

Choosing the Right Approach and Avoiding the Common Calculation Traps

The exam often gives a property type and asks which approach the appraiser would weight most. Anchor the matches:

A multi-adjustment sales-comparison grid

Subject: 3-bed, 2-bath, no garage. A comp sold for $320,000 with 3 beds, 3 baths (a bath is worth $12,000), and a 2-car garage (worth $20,000).

• Comp has an extra bath (superior) -> subtract $12,000.
• Comp has a garage the subject lacks (superior) -> subtract $20,000.
• Adjusted comp value = $320,000 - $12,000 - $20,000 = $288,000.

Remember the rule with CBS / CIA: Comp Better, Subtract and Comp Inferior, Add. You never adjust the subject.

Cap-rate sensitivity and the GRM screen

For income property, Value = NOI / Cap Rate, and value moves inversely to the cap rate. A building with $120,000 NOI is worth $1,500,000 at an 8% cap, but only $1,200,000 at a 10% cap — the same income is worth less when risk rises. For small rentals, the Gross Rent Multiplier offers a fast screen: if comparable properties sell at a GRM of 130 and the subject rents for $2,000/month, value is approximately 2,000 x 130 = $260,000. Because the GRM uses gross rent and ignores vacancy and expenses, it is a rough screen, not a substitute for full capitalization.

The most-missed cost-approach step remains adding land value after subtracting depreciation, and never depreciating the land itself.

Cost Approach

The cost approach estimates value as: Land value + (Cost to reproduce/replace improvements − Depreciation) = Value.

Two cost types: reproduction cost (an exact replica, same materials) and replacement cost (equal utility with modern materials — more common). The approach shines for new construction and special-purpose properties with few comps and no income (a church, a fire station, a library).

The Three Kinds of Depreciation

Depreciation is loss in value from any cause. Sort each scenario into one bucket:

• Physical deterioration — wear and tear (worn roof, peeling paint). Often curable.
• Functional obsolescence — outdated design within the property (a 4-bedroom house with one bath; no closets). Can be curable or incurable.
• External (economic) obsolescence — loss caused by factors outside the property (a new freeway, declining neighborhood). Always incurable — the owner cannot fix what is off-site.

Worked Cost Example

Replacement cost new of the building = $260,000. Accrued depreciation = $35,000. Land value = $90,000.

Value = $260,000 − $35,000 + $90,000 = $315,000.

Note that land is never depreciated — only improvements lose value to wear and obsolescence. Adding land after subtracting depreciation is the step candidates most often botch.

Income Approach

For investment property, value flows from income the asset produces (anticipation). The core tool is capitalization:

Value = Net Operating Income (NOI) ÷ Capitalization Rate.

NOI is annual gross income minus operating expenses and vacancy/collection loss — but before mortgage payments (debt service) and income taxes. Higher cap rates signal higher risk and lower value for the same NOI.

Worked Income Example + GRM

A building generates $90,000 NOI. The market cap rate is 9%.

Value = $90,000 ÷ 0.09 = $1,000,000. If the cap rate rose to 10%, value falls to $900,000 — same income, more risk, less value.

For small residential rentals, appraisers use the Gross Rent Multiplier (GRM): Value = Monthly Rent × GRM. If comparable rentals sell at a GRM of 140 and the subject rents for $1,500/month, value ≈ 1,500 × 140 = $210,000. GRM uses gross rent and ignores expenses, so it is a quick screen, not a precise tool.

Broker Price Opinions (BPOs) and CMAs

A Broker Price Opinion (BPO) is a value estimate prepared by a licensed broker or salesperson — typically for lenders handling short sales, REOs, or loan decisions — without a full appraisal. A CMA serves the same comp-based logic to help a seller price a listing or a buyer make an offer.

Neither is an appraisal: they are not USPAP-governed opinions by a certified appraiser. Many states let licensees charge for BPOs but prohibit them when the licensee has an ownership interest or when federal regulation requires a certified appraisal (e.g., most federally related mortgage originations). Always present a BPO/CMA as an opinion of price, never label it an "appraisal."