Explanations

The original cost of the residence is a historical figure and generally does not directly affect the current market value determined by an appraisal, especially for an old family residence. Appraisal focuses on present-day value, considering current market conditions, the cost to replace the structure, and the property’s income potential, rather than its initial acquisitioncost. The “Principle of Change” highlights that real estate values are constantly fluctuating, making past costs less relevant for current valuations.

In contrast:

• The purpose of the appraisal is the first crucial step, as it dictates the type of value being estimated (e.g., market value for a sale, insurance value for coverage) and influences the methods used in the valuation process.

• The suitability of the residence to the site is a significant factor, tied to principles like “Highest and Best Use” (the most profitable use of the property) and “Conformity” (how well the property aligns with its surroundings). External factors causing “Economic Obsolescence” (loss of value from outside the property) also relate to site suitability.

• The physical condition of the building directly impacts its value. Appraisers consider “Physical Deterioration” (wear and tear) and “Functional Obsolescence” (outdated design or features), which are forms of depreciation that reduce a property’s value. The cost approach to appraisal, for instance, involves estimating replacement cost and then deducting accrued depreciation.

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