Real estate valuation

There are 3 broad approaches that the experts use to value a property.

Comparable sales approach

The comparable sales approach bases valuation on recent sales of similar properties. Obviously, no 2 properties are exactly the same, so adjustments are made for differences in characteristics, such as age, location, condition, and size.

Income approach

The income approach encompasses discounted cash flow, and direct capitalisation.

The discounted cash flow approach estimates property values by calculating the present value of expected future cash flows to the owner.  Typically, the analysis involves projections of annual operating cash flows for a finite number of periods and a resale value at the end of that period.

The direct capitalisation approach estimates the value of an income-producing property by dividing the its net operating income by a capitalisation rate.

Cost approach

The cost approach calculates the replacement cost of a property by estimating the value of the land and the costs of rebuilding it using current construction costs.  Such costs include building materials, labor to build, and various “soft” costs like architectural, engineering, legal, and environmental assessment costs. 

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