The Appraisal
of Real Estate

Fifteenth Edition

Readers of this text may be interested in the following publications from the
Appraisal Institute:
• The Dictionary of Real Estate Appraisal
• Market Analysis for Real Estate
• Residential Property Appraisal
• Rural Property Valuation
• Scope of Work
• The Student Handbook to The ApprAisAl of reAl esTATe

The Appraisal
of Real Estate

Fifteenth Edition

Appraisal Institute • 200 W. Madison • Suite 1500 • Chicago, IL 60606 • www.appraisalinstitute.org

The Appraisal Institute advances global standards, methodologies, and practices through the
professional development of property economics worldwide.

Chief Executive Officer: Jim Amorin, MAI, SRA, AI-GRS, CAE
Director of Professional Services and Resources: Evan R. Williams, CAE, IOM
Senior Manager, Publications: Stephanie Shea-Joyce
Senior Book Editor/Technical Writer: Michael McKinley
Senior Technical Book Editor: Emily Ruzich
Manager, Book Design/Production: Michael Landis
For Educational Purposes Only
The Appraisal of Real Estate, 15th edition, peer-reviewed by Appraisal Institute members is, at
the time of its publication, an authoritative source of recognized methods and techniques for
valuation practitioners. No representation or warranty is made that the data and information
contained in this publication apply to any specific assignment or set of facts. Neither the au-
thors, reviewers, nor the Appraisal Institute accepts any liability arising from the application of
the materials in this publication to any specific assignment or set of facts. Any views or opin-
ions presented in this publication are subject to future court decisions and to local, state and
federal laws and regulations and any revisions to such laws and regulations. This publication
has been prepared for educational and informational purposes with the explicit understanding
that the Appraisal Institute is not engaged in rendering legal, accounting or other professional
services, and nothing in this publication is to be construed as offering such services. The reader
should obtain specific services from appropriate professionals as the need arises.
24 23 22 21 20 1 2 3 4 5
Nondiscrimination Policy
The Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal
profession and conducts its activities in accordance with applicable federal, state, and local laws.
© 2020 by the Appraisal Institute, an Illinois not for profit corporation. All rights reserved. No
part of this publication may be reproduced, modified, rewritten, or distributed, either electron-
ically or by any other means, without the express written permission of the Appraisal Institute.
Cover photo credits:
“Sparks, Nevada” and “Warehouse District, Sparks, Nevada” © Ken Lund / Flickr / CC BY-SA 2.0
“10 Universal City From A Helicopter” © User Vicente A. / Flickr /CC BY-SA 2.0
“Walz Vineyard, Manheim, PA” © U.S. Department of Agriculture
Library of Congress Cataloging-in-Publication Data
Names: Appraisal Institute (U.S.)
Title: The appraisal of real estate / Appraisal Institute.
Description: 15th edition. | Chicago: Appraisal Institute, 2020. | Revised
edition of The appraisal of real estate, [2014] | Includes
bibliographical references and index.
Identifiers: LCCN 2019031830 | ISBN 9781935328780 (hardcover)
Subjects: LCSH: Real property–Valuation. | Personal property–Valuation.
Classification: LCC HD1387 .A663 2020 | DDC 333.33/2–dc23
LC record available at https://lccn.loc.gov/2019031830

Table of Contents

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

PART I Real Estate and Its Appraisal

Chapter 1 Introduction to Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 2 Land, Real Estate, and Ownership of Real Property . . . . . . . . . . . . . . . . 9

Chapter 3 The Nature of Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Chapter 4 The Valuation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

PART II Identification of the Problem

Chapter 5 Elements of the Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Chapter 6 Identifying the Type of Value and Its Definition . . . . . . . . . . . . . . . . . . . 47

Chapter 7 Identifying the Rights to Be Appraised . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

PART III Scope of Work Determination

Chapter 8 Scope of Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

The Appraisal of Real Estatevi

PART IV Data Collection and Property Description

Chapter 9 Data Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Chapter 10 Economic Trends in Real Estate Markets and Capital Markets . . . . . 111

Chapter 11 Neighborhoods, Districts, and Market Areas . . . . . . . . . . . . . . . . . . . . . 137

Chapter 12 Land and Site Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

Chapter 13 Building Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

PART V Data Analysis

Chapter 14 Statistical Analysis in Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

Chapter 15 Market Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273

Chapter 16 Applications of Market Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

Chapter 17 Highest and Best Use Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305

Chapter 18 The Application of Highest and Best Use Analysis . . . . . . . . . . . . . . . 317

PART VI Land Value Opinion

Chapter 19 Land and Site Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335

Part VII Application of the Approaches to Value

Chapter 20 The Sales Comparison Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351

Chapter 21 Comparative Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 371

Chapter 22 Applications of the Sales Comparison Approach . . . . . . . . . . . . . . . . . 397

Chapter 23 The Income Capitalization Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . 413

Chapter 24 Income and Expense Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435

Chapter 25 Direct Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459

Chapter 26 Yield Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475

Chapter 27 Discounted Cash Flow Analysis and Investment Analysis . . . . . . . . . 493

Chapter 28 Applications of the Income Capitalization Approach . . . . . . . . . . . . . 505

Chapter 29 The Cost Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525

Chapter 30 Building Cost Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543

Chapter 31 Depreciation Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 559

Table of Contents vii

PART VIII Reconciliation of the Value Indications and Final Opinion of Value

Chapter 32 Reconciling Value Indications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599

PART IX Report of Defined Value

Chapter 33 The Appraisal Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605

PART X Appraisal Practice Specialties

Chapter 34 Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627

Chapter 35 Consulting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 645

Chapter 36 Valuation for Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651

Chapter 37 Valuation of Real Property with Related Non-realty Items . . . . . . . . . 663

ADDENDA

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 681

Supplementary content is available online at
www.appraisalinstitute.org/15th-edition-appendices/

Appendix A Professional Practice and Law

Appendix B Regression Analysis and Statistical Applications

Appendix C Financial Formulas

Bibliography

Foreword

In 2008, when the thirteenth edition of The Appraisal of Real Estate was published, the
global economy was on the verge of a startling decline and the ensuing economic
distress affected most economic sectors, especially real estate. The cause of that decline
was man-made, and, in retrospect, it was likely avoidable. When the fourteenth edition
of The Appraisal of Real Estate was published in 2013, real estate markets were still recov-
ering from that economic downtown. By then, many real estate professionals had taken
heed of the problem and learned that true value is based on fundamentals, not market
speculation. As the economy rebounded, the real estate community of the last decade
continued to thrive and assert itself in a stronger, more accountable environment.

We find ourselves in a situation much like 2008 today, with a global pandemic
and social justice concerns affecting all areas of the economy—and many other as-
pects of daily life—in the United States and around the world.

Today, appraisers and users of appraisal services do not know what the future
will look like. Will the changes we have made and will make to our lives and our
businesses be permanent or temporary? Will the effects of these dramatic events
change the shape of our cities and towns forever or simply force us to move forward
in new directions? Although we know that “business as usual” is no longer possible,
we do not know much more. At this juncture, the best we can do is accept the current
reality and have faith in knowing that we have the expertise to handle the challenges
that lie ahead and that they will be addressed in our usual unbiased manner and
with patience, flexibility, and a respect for market fundamentals.

This fifteenth edition of The Appraisal of Real Estate is a book that fits the times. It
reflects a renewed commitment to the essential principles of appraisal and the sound
application of recognized valuation methodology. Longtime readers of The Appraisal
of Real Estate will notice significant changes in this text. Like the previous edition, the
new book is structured to mirror the organization of the valuation process, moving
from the identification of the problem through to the report of defined value. Div-
ing deeper, the most noticeable change they will find in this edition is the expanded
discussion of market analysis and highest and best use, with new chapters clarifying

The Appraisal of Real Estatex

these important concepts and demonstrating procedures for their application. For the
first time, the relationship between market analysis and highest and best use is made
explicit and described in a step-by-step analytic procedure. Another major develop-
ment in this new edition is the emphasis on the necessity of definitively describing
the property rights to be appraised in an appraisal assignment to ensure that all the
necessary steps are taken to produce a credible value conclusion.

History confirms that the applicability and importance of different valuation
techniques may rise and fall as real estate markets expand and change and as society
continues to evolve. Nevertheless, the basic principles of valuation that are at the core
of this book, and fundamental to the appraiser’s skills set, remain unchanged.

Finally, The Appraisal of Real Estate, fifteenth edition, would not have been pos-
sible without the contributions of dozens of volunteers, who are identified in the
Acknowledgments. Their dedicated efforts to improve the textbook over the course
of an arduous two-year development process are a testament to the profession’s
thought leaders and their commitment to move the body of knowledge forward and
to ensure that The Appraisal of Real Estate retains its central role in professional valua-
tion literature.

Jefferson L. Sherman, MAI, AI-GRS
2020 President
Appraisal Institute

Acknowledgments

The development of the fifteenth edition of The Appraisal of Real Estate would not
have been possible without contributions from a long list of valuation professionals
active in advancing the Appraisal Institute’s education, publications, and other en-
deavors. The Appraisal Institute would like to acknowledge the generous assistance
of the following content reviewers and consultants: Gregory J. Accetta, MAI, AI-GRS,
Sandra K. Adomatis, SRA, Marius Andreasen, MAI, Randall Bell, PhD, MAI, Charles
T. Brigden, MAI, Stephanie C. Coleman, MAI, SRA, AI-GRS, AI-RRS, M. Lance Coyle,
MAI, SRA, Stephen T. Crosson, MAI, SRA, Douglas S. Defoor, MAI, AI-GRS, Dennis
J. Duffy, MAI, Larry O. Dybvig, Don M. Emerson, Jr., MAI, SRA, Stephen F. Fanning,
MAI, AI-GRS, Brian J. Flynn, MAI, AI-GRS, Kenneth G. Foltz, MAI, SRA, AI-GRS,
Mark R. Freitag, SRA, Daniel M. Fries, SRA, Justin R. Glasser, MAI, Craig M. Har-
rington, SRA, AI-RRS, Frank E. Harrison, MAI, SRA, Steven J. Herzog, MAI, AI-GRS,
Thomas O. Jackson, PhD, MAI, Jeffrey A. Johnson, Kerry M. Jorgensen, MAI, Paula
K. Konikoff, JD, MAI, AI-GRS, Cheryl A. Kunzler, SRA, AI-RRS, David C. Lennhoff,
MAI, SRA, AI-GRS, Mark R. Linné, MAI, SRA, AI-GRS, Micheal R. Lohmeier, MAI,
SRA, George R. Mann, MAI, SRA, AI-GRS, Richard Marchitelli, MAI, Maureen Mas-
troieni, MAI, Dan P. Mueller, MAI, James L. Murrett, MAI, SRA, Mark Ratterman,
MAI, SRA, Stephen D. Roach, MAI, SRA, AI-GRS, Scott Robinson, MAI, SRA, AI-
GRS, AI-RRS Richard J. Roddewig, MAI, Timothy P. Runde, MAI, Michael V. Sanders,
MAI, SRA, Scott M. Schafer, MAI, John A. Schwartz, MAI, Benjamin R. Sellers, MAI,
Leslie P. Sellers, MAI, SRA, AI-GRS, Tony Sevelka, MAI, SRA, AI-GRS, Justin Slack,
MAI, Michael V. Tankersley, MAI, SRA, AI-GRS, AI-RRS, John H. Urubek, MAI,
AI-GRS, Stephen Wagner, MAI, AI-GRS, Joshua Wood, MAI, AI-GRS, and Larry T.
Wright, MAI, SRA, AI-GRS.

The following contributors deserve additional recognition for reviewing the
entire manuscript of this edition of the textbook: Stephanie Coleman, Stephen Roach,
and Leslie Sellers. Their contribution to the book’s development—and patience with
the process—are greatly appreciated.

Introduction to Appraisal

A real estate developer visits a plot of vacant land near a suburban highway inter-
change and makes some rough calculations about the feasibility of building and leas-
ing an office building on the site in the next two years. A residential real estate broker
with the listing for a three-bedroom, two-bathroom house in an active urban market re-
searches the prices paid recently for homes of a similar size with similar physical char-
acteristics before suggesting a listing price to the seller. Another broker looks through
the multiple listing service before showing a young couple homes for sale in nearby
suburban neighborhoods that are within the couple’s price range. What do these situa-
tions have in common? They all involve decisions about real estate and its value.

A county tax assessor runs data for hundreds of properties through a battery of
statistical models as part of the three-year reassessment of commercial real estate in
the municipality. A loan officer at a branch of a regional bank looks over a loan ap-
plication and several supporting documents as part of the due diligence in making
a recommendation on construction financing for the expansion of a local manufac-
turing company’s office-warehouse. An attorney represents the owner of farmland
adjacent to a county road in a dispute with the county department of transportation
over the amount of just compensation due for land taken as part of a road improve-
ment project.

Clearly, all the individuals in these scenarios are making decisions about real
estate based on their perceptions of the value of an individual property or a group of
properties in a specific market. However, none of these key participants in the real
estate marketplace is performing an appraisal.

What Is an Appraisal?
In simplest terms, an appraisal is “the act or process of developing an opinion of
value” of an asset.1 The asset in question could be anything—fine art, machinery and

1. As a technical term, appraisal is defined similarly in professional standards and regulations such as the Appraisal Foundation’s Uniform Standards
of Professional Appraisal Practice and the Appraisal Institute’s Code of Professional Ethics and Standards of Valuation Practice.

1

The Appraisal of Real Estate2

equipment, or even a specific type of business. The focus of this book, however, is the
appraisal of real property, i.e., rights in real estate.

The value developed in an appraisal is a measure of the relative worth of the as-
set, expressed in terms of money. In other words, the property appraisal quantifies to
a certain level of precision what buyers and sellers would consider the relative worth
of an identified interest in a parcel of land and any improvements to that land.

Implicit in the traditional definition of appraisal is the idea that an appraisal is
someone’s opinion, rather than a fact. A useful way to think about what an appraisal
is would be to look more closely at the people who develop those opinions of value.
While anyone can have an opinion of value, appraisers are professionals with train-
ing and expertise in accepted valuation methods and techniques who have an ethical
obligation to remain disinterested and unbiased while performing an appraisal.
That professional expertise gives the value opinion of an appraiser credibility in the
marketplace, which the opinions of other market participants do not have. And what
makes the appraiser’s opinion more valuable to clients is knowledge and experience,
combined with an unbiased analytical process, supported by relevant evidence and
logic, and resulting in credible value conclusions.

In the United States, licensed and certified real estate appraisers meet educational,
experience, and testing requirements set by states and can perform appraisals in the
jurisdiction covered by their licensing credentials. The federal government has man-
dated that all states establish licensing and certification programs to regulate appraisals
for federally related transactions (i.e., certain real estate–related financial transactions
involving federally insured depository institutions). Some states have established laws
requiring licensing or certification only for appraisals performed for these purposes,
while other states require licensing or certification for appraisals performed for any (or
almost any) purpose. In general, the courts do not require an appraiser to be licensed or
certified. However, possession of a state-issued license or certification has become a ba-
sic indication of appraiser competency. Outside the United States, appraisers are com-
monly known as valuers. Unsurprisingly, the professional qualifications of valuers vary
from country to country, often depending on the nature of the economic system and the
history and development of the valuation profession within a particular country.2

Professional standards, such as the Appraisal Institute’s Standards of Valuation
Practice (SVP), the Uniform Standards of Professional Appraisal Practice (USPAP),
and the International Valuation Standards (IVS), highlight the ethical codes that valu-
ation professionals must follow. For example, USPAP defines an appraiser as “one
who is expected to perform valuation services competently and in a manner that is
independent, impartial, and objective.” By that definition, any potential client of an
appraiser should be able to expect a certain level of professionalism from anyone
representing himself or herself as an appraiser. Similarly, the International Valuation
Standards outline the expected objectivity of valuers as follows:

The process of valuation requires the valuer to make impartial judgements as to the reliability of
inputs and assumptions. For a valuation to be credible, it is important that those judgements are
made in a way that promotes transparency and minimises the influence of any subjective factors
on the process. Judgement used in a valuation must be applied objectively to avoid biased analy-
ses, opinions and conclusions.3

2. For a discussion of licensing criteria in specific countries, see Howard C. Gelbtuch with Eunice H. Park, Real Estate Valuation in Global Markets,
2nd ed. (Chicago: Appraisal Institute, 2011).

3. International Valuation Standards 2017 (London: International Valuation Standards Council, 2017), 6.

Introduction to Appraisal 3

The Code of Professional Ethics of the Appraisal Institute echoes those other stan-
dards documents, defining a valuer as “[o]ne who is expected to provide [s]ervices in
an unbiased and competent manner.”

Real property appraisers have extensive training and experience and are com-
mitted to the profession. Appraisers are bound to strict compliance with regulatory
requirements, and many are members of appraisal organizations that encourage
participation in professional activities and educational development. Members agree
to peer review of their ethical conduct and work performance, which reflects their
strong commitment to professionalism. Like many other professions, the appraisal
profession encompasses specific areas of expertise, and some areas of appraisal work
require significant training and experience. Competency is a key factor in every ap-
praisal assignment.

Continuing education is the cornerstone of professional development. By pursu-
ing continuing education, appraisers demonstrate their commitment to maintaining
their skills at a level far above the bare minimum required to satisfy state credential-
ing requirements. Individuals who complete a rigorous educational program and
earn recognized professional designations find that their employment and business
prospects are considerably enhanced. A commitment to professionalism helps regu-
late the industry and ensures quality appraisal work.

Services relating to the value of property are provided by a variety of profession-
als and others. The services provided by appraisers (valuers) are known as “appraisal
practice” or “valuation practice.” These services include appraisal and review, as well
as a wide range of activities such as measuring the size of buildings and developing
detailed market studies. When performed by an appraiser, the client can expect these
services to be provided competently and in a manner that is independent, impartial,
and objective—as these are the characteristics that define an appraiser.

What Is Real Property?
Precisely what does a real estate appraiser value? In simplest terms, real property
rights are valued, not the real estate itself. In real estate appraisal, an important dis-
tinction is made between the terms real estate and real property. Although some laws
and court decisions treat the terms synonymously for legal purposes, in appraisal
practice the terms real estate and real property are distinctly different.

Real estate is the physical land and appurtenances affixed to the land—e.g.,
structures. Real estate is immobile and tangible. Real estate includes the following
tangible components:
• Land
• All things that are a natural part of land, such as trees and minerals
• All things that are attached to land by people, such as buildings and site im-

provements
In addition, all permanent building attachments (for example, plumbing, electrical
wiring, and heating systems) as well as built-in items (such as cabinets and elevators)
are usually considered part of the real estate. Real estate includes all attachments, both
above and below the ground.

Real property includes the interests, benefits, and rights inherent in the owner-
ship of physical real estate. In an appraisal, a particular set of real property inter-

The Appraisal of Real Estate4

ests—not the real estate—is what is valued. Real estate
in and of itself has no value. The rights, or interests, in
real estate are what have value.

The terms estate and interest may be used differ-
ently depending on the jurisdiction or the discipline. In
valuation practice, an estate is what is owned, includ-
ing the right of possession and the power to exclude
others. Interests are rights in real property; they can
benefit or burden the land and affect the value of an
estate. What is usually valued is an estate subject to
specified interests. Therefore, the appraiser’s task is to
identify not only the estate (fee simple estate, leasehold
estate, life estate) but also the interests associated with
the real estate, such as leases, easements, restrictions,

encumbrances, reservations, covenants, contracts, declarations, special assessments,
ordinances, or other items of a similar nature. In some assignments, interests alone
are valued. For example, the subject of the appraisal may be an easement.

The Bundle of Rights
The total range of private ownership interests in real property is called the bundle
of rights. Imagine a bundle of sticks in which each “stick” represents a distinct and
separate right or interest. The bundle of rights contains all the interests in real prop-
erty, including the right to use the real estate, sell it, lease it, enter it, and give it away.
Constitutional, statutory and common law provides for the private enjoyment of
these rights, subject to certain limitations and restrictions.

Public Restrictions on Ownership
In the United States, private ownership of real property rights is guaranteed by the
US Constitution but is subject to certain government restrictions, known as the four
powers of government:
• Taxation
• Eminent domain
• Police power
• Escheat

Taxation is the right of government to raise revenue through assessments on
goods, products, and rights. The US Constitution effectively precludes the federal
government from taxing real property directly, although the income and proceeds
from the sale of real property may be subject to federal income taxation. The right to
tax property is reserved for state and local governments.

Eminent domain is the right of government to take private property for public
use upon the payment of just compensation. This right can be exercised by a govern-
ment agency or by an entity acting under governmental authority such as a housing
authority, school district, park district, or right of way agency. Condemnation is the
act or process of enforcing the right of eminent domain.

Police power is the right of government through which property is regulated to
protect public safety, health, and general welfare. Examples of police power include

The distinction between real
estate and real property is
fundamental to appraisal:
real estate
An identified parcel or tract
of land, including improve-
ments, if any.
real property
The interests, benefits, and
rights inherent in the owner-
ship of real estate.

Introduction to Appraisal 5

zoning ordinances, use restrictions, building codes, air
and land traffic regulations, health codes, and environ-
mental regulations.

Escheat is the right of government that gives the
state or a local government (e.g., township or county)
titular ownership of a property when the owner dies
without a …