DEFINITION of 'Appraisal Approach'

A procedure for determining an asset's value. The appraisal approach values assets based on a number of factors, such as its cost, the income it generates or its fair market value as compared to similar assets. A different dollar value will be assigned to an asset depending on which of these factors the appraiser primarily bases his or her estimate on. Sometimes the appraised value will not coincide with an asset's market value and buyers will often pay more or less than an asset's appraised value based on what the asset is worth to them. No matter which appraisal approach is used, an appraisal is only an educated guess as to what price the asset would fetch in a free market.

BREAKING DOWN 'Appraisal Approach'

Appraisals are used to determine the worth of high-value assets such as real estate, jewelry, businesses and vehicles. They are usually performed in conjunction with a sale or for insurance purposes. For the results to be taken seriously, an appraisal must be conducted by an individual with expert knowledge of the asset being assessed. A diamond ring should be appraised by a jeweler, and a business should be appraised by a valuation firm.

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