An appraisal is an opinion of value derived from the market. The three major methods used to formulate an opinion of value (the cost, sales comparison, and income approach) each relies on data derived from the market. Broadly, various elements of comparison are extracted from market oriented transactions, compared with the property under consideration, and applied to the subject property. This process is based on the statistical theory used in multivariate linear regression analysis. While based on sound theory, its application to commercial real estate is often limited due to the unique characteristics of commercial property, a limited sample size, and the difficulty associated with identifying the most relevant variables.
What factors, for example, make the location of one small apartment development more desirable than another? Is it the quality of surrounding development? The median gross income or, perhaps, the proximity to nearby employment centers? In reality, the impact of these factors are often difficult, if not impossible, to quantify. The judgment and integrity of the appraiser are important factors but there will always be some degree of uncertainty regarding the value of commercial real estate. We can make educated guesses and formulate a reasoned, logical, and defensible argument regarding the value of a commercial property but at the end of the day an appraisal is an opinion of value. Without question, some appraisals are more defensible than others. And sometimes good men disagree.
As frustrating as it may be, commercial appraisal work can not be reduced to a science. Nor can it be reduced to an art. As with theology, commercial appraisal work will always include an element of art, science, and mystery.