When you request an appraisal, you receive an appraisal report (satei-sho) that includes not just a figure but the reasoning behind how it was calculated. Rather than judging by the size of the number alone, understanding which method was used will help you compare appraisals from multiple companies.
- The appraisal report records the method used as the basis for the figure.
- For owner-occupied residential property, the comparable sales method (torihiki jirei hikaku-hō) — comparing similar closed sales — tends to be central.
- The cost approach (genka-hō), based on replacement cost, is sometimes used to calculate the building's value.
- For tenanted or investment properties, the income approach (shūeki kangen-hō) — working backward from earning power — is commonly used.
- The appraisal figure is a reference price and doesn't guarantee the property will sell at that amount.
An Appraisal Report Records the Basis for Its Figure
An appraisal report doesn't just show a number — it also records the information and method used to reach that figure. Rather than choosing an appraisal company based on the highest number alone, it's important to keep an eye on whether the reasoning behind it holds up.
What Is the Comparable Sales Method?
The comparable sales method gathers nearby closed sales with conditions similar to the subject property, then calculates a price by adjusting for differences in location, building age, floor area, and so on. It's the basic approach widely used for appraising owner-occupied residential property such as condominiums (mansion) and detached houses.
What Is the Cost Approach?
The cost approach calculates the replacement cost of rebuilding the building new today, then subtracts depreciation based on the years elapsed to arrive at a price. It's sometimes used specifically to calculate the value of the building portion. An appraisal may combine the two — using the comparable sales method for the land and the cost approach for the building, then adding the two together.
What Is the Income Approach?
The income approach works backward from the rental income the property would generate if leased out, deriving a price from its earning power. There are two variants: the direct capitalization method (chokusetsu kangen-hō), based on a single year's income, and the DCF method, based on projected income over multiple years. Both are commonly used for tenanted or investment properties. We cover selling a property with a sitting tenant (an owner-change sale) in sell-17.html — worth a look as well.
What to Check in the Appraisal Report
When you check an appraisal report, it's worth looking not just at the method used but also at the closed sales cited for comparison and the expected time to sale. Be cautious if a high figure is presented with only vague reasoning behind it. Some agents present a price above the market simply to win the listing agreement, so it's important to check whether they can actually explain their reasoning. If anything is unclear, it's worth asking the agent specifically which sales they referenced. An agent who can explain their reasoning carefully tends to be one you can trust with the rest of your sale. If the reasoning stays vague, you should carefully assess how reliable the appraisal figure really is.
Why It's Worth Comparing Multiple Appraisals
When you request appraisals from multiple companies, the figures can differ. This comes down to differences in which sales were referenced, the appraisal logic used, and each company's sales approach. We cover why appraisal values differ between companies in sell-09.html — we'd recommend comparing the reasoning, not just the numbers.
FAQ
Will my home definitely sell at the price shown in the appraisal report?
The appraisal figure is only a reference price — it doesn't guarantee the eventual sale price. You'll decide your asking price with reference to the appraisal, while also factoring in current market conditions and buyer response.
Which is more accurate, the comparable sales method or the income approach?
The suitable method depends on the type of property, so neither can be called more accurate across the board. The comparable sales method tends to be central for owner-occupied residential property, while the income approach tends to be central for investment property.
Should I just choose the company with the highest appraisal figure?
Rather than choosing based on the highest figure alone, it's important to check whether the basis for the calculation is clear. We look at why appraisal values differ between companies in sell-09.html.
Summary
Looking beyond the figure in your appraisal report, to the method behind it, lets you move forward with your sale with greater confidence. Understanding the thinking behind common methods such as the comparable sales method and income approach will help you compare appraisals from multiple companies.