Approaches in Valuing Real Estate

Valuation of Real Estate Properties

Valuation of any commercial property is intrinsically valuable as it determines the worth of any particular real estate property.

Income Valuation Approach

In this scenario, a comparison is created where an investors’ acquisition price is centered on the anticipated return rate against the investment’s intrinsic risk.

This valuation approach approximates the present value of anticipated future returns from the investment plus the cash realized on the property’s disposal.

The idea is simply the property’s worth depending on the anticipated return rate required by an investor to finance the property.

Cost Valuation Approach

The cost valuation approach looks at what the investor would incur to acquire land and erect a new property with the same fundamental amenities as the extant property being valued, i.e., the subject property.

It takes into account the depreciated value of the existing property in determining the viability of constructing a new property in the present market, or the property location is not conducive for its new utilization, i.e., an investor should not be in a position to incur additional costs for real estate investment in contrast to the cost the same investor would incur in buying raw land and erecting a similar property.

Sales Valuation Approach

Under this valuation approach, the prices of similar properties are compared in the current market.

Factors such as size, age, location, and property state are considered when comparing the property values. Market condition differential adjustments are made at the time of sale.

The ideology is that an investor is not expected to incur higher costs than other investors for a similar property.

Question

James has been asked to appraise the value of a property given the replacement cost, cost of depreciation, and the cost to reproduce the asset. The approach that James will use to value the property is most likely to be:

1. Income Approach
2. Cost Approach
3. Sales Comparison Approach

Solution

The correct answer is B.

The cost approach considers how much it would cost to replicate an asset and deducts depreciation and other factors that reduce the asset’s value.

A is incorrect. The income approach valuation method considers how an investor can pay for a property based on the expected discounted cash flow.

C is incorrect. The sales comparison approach considers the prices of similar properties that are compared in the current market.

Reading 36: Investment in Real Estate Through Private Vehicles

LOS 36 (a) Discuss the income, cost, and sales comparison approaches to valuing real estate properties.