Real Estate Valuation Methodology

Valuation Methods

Sales Comparison Approach

01 (Market Approach)

02 Income Approach

03 Residual Approach

04 Cost Approach

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 Valuation Methods
Sales Comparison Approach
(Market Approach)
Description
The sales comparison approach (or market approach) is based upon
direct comparison of the subject property (asset) with other
comparable properties, which have recently been sold or are offered
for sale. The unique characteristics (location, size, quality,
development potential etc.) of the subject property are the primary
limiting source in applying this method. This approach provides a
reliable indication of value particularly in an active market.
Suitable for
• Land (development and agricultural land)
• Residential properties (houses and apartments)
• Can also be used for the following types of properties, but only
in the liquid markets with sufficient comparable evidence:
• Commercial properties (big-boxes, shopping malls,
office buildings, industrial / logistic centres, multifamily
properties, etc.)
• Trading properties (hotels and resorts, camps, golf,
marinas, restaurants, gas-stations etc.)
Income Approach
Description
The Income approach implies assessment of the potential
profits and cash flows. With the asset, appraiser needs to
consider the operating environment of the asset to determine
the potential for market revenue growth. This method
recognizes market conditions, likely performance, potential
and time value of the money.
Suitable for:
• Commercial properties (big-boxes, shopping
malls, office buildings, industrial / logistic centres,
multifamily properties, etc.)
• Trading properties (hotels and resorts, camps,
golf, marinas, restaurants, gas-stations etc.)
 Valuation Methods
Cost Approach
Description
The Replacement Cost Approach is applicable for improved
properties, when the existing property and land have the same
highest and best use and the improvements have suffered
little loss in value (depreciation). Using this approach, the
appraiser should estimate the depreciated Replacement Cost
of the improvements (buildings, etc.) and add it to the value of
the land on which the buildings are built in order to arrive at
the overall value of the property.
Suitable for:
• Commercial properties (big-boxes, shopping
malls, office buildings, industrial / logistic centres,
multifamily properties, etc.)
• Trading properties (hotels and resorts, camps,
golf, marinas, restaurants, gas-stations etc.)
Residual Approach
Description
The Residual Value Approach is a sub-method of the Income
Approach. Having established the development potential of the land,
a residual valuation can be expressed as a simple equation: Value of
completed development – Development costs - Other costs –
Developer’s profit = Land value. Where a project is more complex
and project timeline longer a Discounted cash flow model is used to
take into account the time value of money.
Suitable for
• Land (development land)