The Myth of Three Independent Approaches to Value

Summer 2001, Vol 26, No 2

Abstract: Though many appraisers hold the belief that the three traditional approaches to value—the Cost Approach, the Income Capitalization Approach, and the Sales Comparison Approach—are interrelated, there are still a large number of appraisers who adhere to the premise that they are completely independent methods of estimating value. The focus of this article is to further the notion that the three approaches are not only interrelated, but the results of each approach are an integral part of achieving a reliable estimate of value. In other words, the three traditional approaches, when dealing with income producing real estate, are components of an overall Market Approach, and in fact should be renamed the Cost Analysis, the Income Capitalization Analysis, and the Sales Comparison Analysis. Assumptions derived from one approach form the basis for the analysis in another; therefore, a thorough Market Approach encompassing the Cost Analysis, Income Capitalization Analysis, and Sales Comparison Analysis is critical to the appraisal process.