[1] Five factors are usually considered when determining comparables: A real estate appraisal is like any other statistical sampling process.
The comparables are the samples drawn and measured, and the outcome is an estimate of value—called an "opinion of value" in the terminology of real estate appraisal.
However, since real estate markets are known to be highly inefficient, and market transaction data is subject to significant error, the appraisal process generally relies on multiple simultaneous approaches to value, with a judgmental reconciliation as the final step to arrive at the appraiser's opinion.
[2] This approach estimates the construction cost of the improvements, as if new, and deducts factors for depreciation, disutility, and external obsolescence.
External obsolescence occurs when circumstances outside the subject property's boundaries negatively impact its value.
Entrepreneurial profit is the amount of compensation necessary to induce someone to organize the site, investors, debt, architecture, construction and leasing necessary to plan and build a property.
The appropriate amount of entrepreneurial profit depends on factors such as competition, the difficulty of the project, market conditions and the wisdom of the developer's plan.
Appraisers are often called upon to estimate the impact of specific factors, such as contamination, an easement, or a construction defect.