Why does an appraiser create a reconstructed operating statement when using the income approach?

An appraiser creates a reconstructed operating statement primarily to develop an estimated projection of expected income and expenses. This statement is vital in the income approach to valuation, as it helps to summarize and forecast the operational performance of a property. By reconstructing the operating statement, the appraiser can analyze historical data, adjust for any anomalies, and incorporate current market conditions to arrive at a realistic estimate of future income potential and associated expenses.

This process is crucial because it provides a detailed financial picture that reflects how a property is expected to perform financially over time, allowing appraisers to determine its value based on its income-generating capabilities. The reconstructed statement ultimately serves as the foundation for estimating the capitalization rate and yield, which are essential components in the income approach.

In contrast, while displaying past income, analyzing neighborhood trends, and assessing physical condition are important aspects of a comprehensive appraisal, they do not directly focus on providing updated financial projections necessary for the income approach.