The Three Approaches (Categories?_)

[RCA]

So, I got this email a couple of days ago from an educator asserting there are more than three traditional approaches to value. And yes, it has always been the case that said individual's comments, to be a bit positive, do provoke thought - but in my opinion, have invariably been significantly off track in conceptual understanding. So far off track, I feel a need to comment:

The so-called "Three Approaches to Value: (1) The Sales Comparison Approach, (2) The Income Approach and (3) The Cost Approach are to be exact just CATEGORIES of valuation techniques. Each category has many versions or variations in estimating value.

1. The Sales Comparison Approach Category covers those approaches that rely on comparing past sales transactions to come to some value conclusion. This could be matched pairs analysis, linear, non-linear, parametric, non-parametric regression, cluster analysis, kriging and other such techniques. It could be looking at a few selected sales comparables or many.

2. The Income Approach Category is focused on valuing projected income streams. In this category for example, we have Direct Capitalization, DCF, Gross Multiplier and so on.

3. The Cost Approach Category probably has the most approaches - because each approach is typically narrowly defined to some set of property types and is bound to a set of cost tables and measurements. Compare the California BOE Assessor's Handbooks for different property types (my favorite) to Marshall & Swift and other cost services.

Now, of course, many appraisals will use more than one of the above approach categories and weight them by some criteria to come to a valuable conclusion. So, in effect we can get a hybrid approach by combining the above three categories and even their included approaches. For example, there is nothing that says an appraiser can't consider both the Direct Capitalization and DCF methods.

Now, I am left wondering as to whether there couldn't just possibly be some 4th Category. On the tip of my tongue is "In Use Approach". But then, that is most often just a variation under Income Approach. But, I wonder.

Any suggestions for other truly different Value Approach Categories?

 

[Tom4value]

So, I got this email a couple of days ago from an educator asserting there are more than three traditional approaches to value. And yes, it has always been the case that said individual's comments, to be a bit positive, do provoke thought - but in my opinion, have invariably been significantly off track in conceptual understanding. So far off track, I feel a need to comment:

The so-called "Three Approaches to Value: (1) The Sales Comparison Approach, (2) The Income Approach and (3) The Cost Approach are to be exact just CATEGORIES of valuation techniques. Each category has many versions or variations in estimating value.

1. The Sales Comparison Approach Category covers those approaches that rely on comparing past sales transactions to come to some value conclusion. This could be matched pairs analysis, linear, non-linear, parametric, non-parametric regression, cluster analysis, kriging and other such techniques. It could be looking at a few selected sales comparables or many.

2. The Income Approach Category is focused on valuing projected income streams. In this category for example, we have Direct Capitalization, DCF, Gross Multiplier and so on.

3. The Cost Approach Category probably has the most approaches - because each approach is typically narrowly defined to some set of property types and is bound to a set of cost tables and measurements. Compare the California BOE Assessor's Handbooks for different property types (my favorite) to Marshall & Swift and other cost services.

Now, of course, many appraisals will use more than one of the above approach categories and weight them by some criteria to come to a valuable conclusion. So, in effect we can get a hybrid approach by combining the above three categories and even their included approaches. For example, there is nothing that says an appraiser can't consider both the Direct Capitalization and DCF methods.

Now, I am left wondering as to whether there couldn't just possibly be some 4th Category. On the tip of my tongue is "In Use Approach". But then, that is most often just a variation under Income Approach. But, I wonder.

Any suggestions for other truly different Value Approach Categories?

From my 1st class in appraising, many, many moons ago, I was taught there are 3 approaches to market value. He said, “you cannot make up another”.

 

[Charles West]

The only thing I could suggest is an emotive approach, the highly subjective Fernando way, a qualitative EQ score, maybe related to first impressions of the approach or curb appeal.

 

[George Hatch]

I've heard in the past there as many as 12 different approaches to value.

 

[RCA]

Yea, it is hard to budge beyond 3 categories. I keep thinking though, you could do something with "In Use". But In Use, if you don't look at it strictly from an income perspective, is so totally subjective, you can't do much with it. But ... I keep thinking about it. The 4th is elusive.

 

[J Grant]

Yea, it is hard to budge beyond 3 categories. I keep thinking though, you could do something with "In Use". But In Use, if you don't look at it strictly from an income perspective, is so totally subjective, you can't do much with it. But ... I keep thinking about it. The 4th is elusive.

There is a value in use.

It is not considered the same as market value for an appraisal ( though it can influence what people pay for a property)

 

[Tom D]

i only use the 1 approach on every appraisal, big urban, lot of data. didn't know there were 2 others. i go with the statement below.

The Appraising Residential Properties, 4th Edition, Appraisal Institute, "Other Quantitative Adjustment Techniques”, Page 344 further states: “…In instances where paired sales analysis is not conclusive, the appraiser may apply judgment to resolve the problem." The adjustments resulting from the appraiser's judgment is based on a study and understanding of historic or past buyer preferences. It further suggests that cost and depreciated cost data may be used with the appraiser arriving at the value contribution (not cost new) of certain features. The process of supporting the contribution of individual variables (features) is limited and often difficult to quantify, with adjustment deemed to be qualitatively supported unless otherwise addressed. All methods of supporting adjustments are usually limited by inherent uncertainties within the applications themselves.

i would say that comment goes with different approaches to value, whatever you use. All methods of value are usually limited by inherent uncertainties within the applications themselves.

 

[J Grant]

Value-in-use​

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Definition of value-in-use
Value-in-use of an asset is the net present value of cash flows or some other benefits which is generated by an asset in a certain use for a certain owner. This term is used in the U.S. and is usually estimated at use and this value is less than the highest and best use and so this value is usually lesser than the market value. The value in use of an asset may be higher than market value, when a person gets special benefits like grandfathered zoning, agglomeration benefits, or extraordinary financing and at that time the value is regarded as an investment value.
The value in use of a property is the value or worth of that property under a specific use, which means the value of the property as it is being used at present. The value in use amount of a property may be more or less than its market value. For example, a land which is located at a place which is in the path of growth for a major project and is used as a small farm will have the value in use less than the market value. Such a land’s market value will be much higher than its value in use.
The concept of value in use first appeared in February 1987 and there were many people who favored it and wanted the value in use definition to be put in the official literature of American Society of Appraisers. The difference between the fair market value in exchange on tangible assets generally results in more residual value for intangible assets that is usually more than their value contribution. Since, it is difficult to find a real property according to the expectation, people are more inclined to pay premium to avoid startup costs and risk. It is for this reason; value in use definition is required. The value in use appraisal is best for business valuation and for allocation of purchase price. However, value in use appraisal is not suitable when a general use property has been vacant and is for sale in the open market or for financing purposes.

 

[Tom D]

for a FHA pre foreclosure appraisal is was noted as a CWCOT market value assignment. took a while to find what that meant, don't remember anymore.

 

[Joe Flacco]

I've heard in the past there as many as 12 different approaches to value.

There are only three. But there are probably different ways you could develop the three approaches to value. The three approaches to value are just broad concepts.