The approaches utilized to value real estate from an evaluation perspective establishes the possible sale price a property would capitulate on the open market with ample time for marketing by a well-informed seller who is not under coercion, completely informed of market conditions and a conversant buyer agreeable to perfect the acquisition also without undue pressure to act. The array of values derived from the methodologies used and the ultimate wrapping up after implementing adjustments for diverse variables represents processes used to establish the market value of the subject property at a specific time and under specific conditions. Changes in the variables e.g. comparable sales, vacancy factor, depreciation for functional or economic obsolescence, etc consistent alters the values derived from the procedures and the obtained termination.
According to Selim Zherka, the three techniques used for finding a range of property values from which the ultimate decisive worth is attained are the: – Cost Approach, Income Approach, and Comparable Sales Approach. Each has its own procedure for calculating a property’s value and is given altering worth or relevancy in the ultimate value attributed to the realty.
Income Approach – ascertains the value of real estate as an imitative of its net operating income in relation to the established capitalization rate linked with the asset class in its submarket. The value calculated from this approach is considered more indicative of the true worth of the property by some practitioners in contrast to the other two approaches below from an investment viewpoint.
Cost Approach – ascertain the value of real estate calculating the existing worth to rebuild improvements at cost minus depreciation for economical and functional obsolescence; the underlying land is not depreciable. Procedural changes, technological advancements, more user friendly space layout, adaptable efficient materials plus industry changes and the requirements of the end user, etc can lessen the appeal of once highly required buildings or leasable space corresponding to newer inventory. This results in a smaller market value being allocated to the property factoring its condensed appeal to a broad pedestal market.
Comparable Sales Approach – ascertains the value of real estate from the historic sales of comparable properties in the submarket with regulations for disparate characteristics with these properties; conveying values for these features or lack thereof and subtracting or adding dollar amounts reflective of the decrease or increase in value attributed. As Selim Zherka says, this procedure draws its data from the sales activity in the marketplace and the sales of properties or historical purchases of the same CRE type.
The combined information attained from each approach is analyzed with weight given to relevant methods depending on the nature of the subject property, the quality of the data obtainable for the approach and the function of assigning value. The nature of the subject property influences the technique which is well thought-out most pertinent to determining value, e.g., is the stalled mixed-use development, property vacant land, functioning hotel, etc. The ultimate value given to the property factors all the variables pertinent to the reality and the understanding of the individual drawing the finale of property value.