The valuation steps applied to create a supported conclusion of a defined value based on an analysis of applicable general and specific data. The evaluation to create an opinion on the value of a real estate property follows specific sets of processes that reflect 3 different methods. These include:

– Cost method
– Direct comparison method
– Income approach method

One or more of these methods can be used in evaluating real estate valuation. The methods to be used will depend almost entirely on the type of property being appraised or appraised; however, you can also take into account the use of the assessment, the scope of the work involved, and the availability of data for analysis.

Cost method

The cost approach to appraisal and appraisal is established by understanding construction methodologies and property attributes related to cost. The cost approach is estimated by adding the cost of the land to the current construction cost related to all improvements to the land and subtracting depreciation on all improvements to the land. Building construction costs would include a cost of reproduction or a cost of replacement of the same or similar materials or similar systems. This approach works best when used for evaluating newer or newer properties that are not frequently traded on the market. Actual costs are generally derived from cost estimating software, cost manuals, builders, and contractors. Note: Land will remain a separate value when using the cost approach.

Direct comparison approach

The direct comparison method of real estate appraisal is most useful when there are a large number of similar similar properties that have recently traded on the market or are currently on the market. Using this method, the evaluation would come from identifying the subject with similar properties, called comparables (or comps). The sale prices that are most identified with the subject would have a greater weight in the value, as opposed to one that is further from the characteristics of the subject. Most of the time, comparables would create a range of value, over which; Opinion must be used to find an exact value. Several items or factors are used to rate the degree of similarity between the comparables and the topic. This would include: real property rights, financial terms, conditions of sale property, post-sale expenses, location, market factors, physical characteristics, economic characteristics, use / zoning, non-real estate sales components (personal property, accessories). Once the best comparables are established, a dollar figure or percentage is applied to the sale price of each property to estimate the hypothetical value of the item. For example, Comparable A has 1 more bathroom than the subject; therefore, subtract $ 9000 from the comparable to hypothetically obtain that the sale reflects the same characteristic as the subject.

Income approach

The income method for evaluating real estate would be from an analysis of the present value of the future benefits of real estate. The income and resale value of a property at the time of return can be capitalized into a current lump sum. There are two methods of the income approach; one is direct compounding and the other is yield compounding. Direct compounding is the ratio of a year’s income to the value indicated by a compounding rate or income multiplier. The capitalization of the return is the ratio between several years of stabilized income and the value at the end of a specific period reflected in a rate of return. The most commonly used return capitalization method would be discounted cash flow analysis.