If the most likely purchaser of the subject property is an investor, which appraisal approach becomes more relevant?

• A. Cost approach
• B. Income approach
• C. Sales comparison approach
• D. Reconciliation approach

Answer: (B)

When a property is likely to be purchased by an investor, the value is driven by the property’s ability to generate income for the buyer. The income approach directly estimates value by converting expected future net income into present value, using either a capitalization rate on net operating income or a discounted cash flow analysis. This ties the value to return, yield, and risk, which are the critical factors for an investor.

The other methods play different roles. The cost approach focuses on replacement cost and depreciation, which is less about expected returns and more about how much it would cost to recreate the property. The sales comparison approach relies on recent sales of similar properties to infer value, which is useful in many markets but may not reflect the investment’s income-generating potential. Reconciliation is not a standalone valuation method; it’s the process of weighing the results from the approaches to arrive at a final value, with the income approach often carrying the most weight for investor buyers.