There are three methods to valuing real estate. The three methods or simply approaches are usually applied to any valuation assignment before a final value judgement is made. In the first method value is arrived at by comparing the property with similar recently sold and listed properties. In the second method value is arrived at by considering the cost of acquiring or reproducing the same real estate. In the third method value is arrived at by considering the net cash flows of the real estate over its life. These are explained below.
1 Market Approach
Under the Market Approach (sales comparison approach), you obtain sales of properties which are most similar to the property to be valued. For each sale, attributes such as property type, location, land and floor areas, condition, accommodation, amenities, date of sale and price are noted. Then based on those attributes, a comparison is made with the property under valuation, making reasonable adjustment accordingly to arrive at single value. You may as well consider listing where these are reasonable.
2 Income Appraoch
In this method, the rent achieved from the property or achievable by the property through comparison with similar properties is estimated and calculated per year. All operating expenses such as repairs, land rate and rent, insurance, management fees are subtracted from the rent above to obtain the net income. An appropriate multiplier (capitalization rate) is obtained from the relevant property class market and applied to the net income to arrive at the value of the property.
3 Cost Approach
Under the cost approach, also referred to as the contractor’s method, you assess the value of the land separately through sales comparison approach as above. The cost of putting up the building new is computed including the cost of finance. From this figure depreciation is computed and subtracted to obtain the depreciated replacement cost of the building. The final value estimate is arrived at by adding the value of the land and the depreciated replacement cost of the building.