Traditionally, there are 3 approaches to property valuation income, relative and cost. In this composition, I’ll compactly talk about each of them.
The first approach that pundits use to value real estate is the income approach.
Real estate valuation in this case is grounded on the supposition that the value of real estate is equal to the present value of rights to unborn income. The buyer, considering the accession of an object moment, expects to admit a certain income in the future, which will allow him to
a) recoup the original investment
b) keep the object in a leasable condition
c) vend the object at the end of the cast period
and, most importantly, admit income from this investment.
What styles allow you to calculate the request value of income?
system 1 Direct capitalization
system 2 Discounted cash income analysis
The direct capitalization system is remarkable in that it allows, having made a number of hypotheticals, to snappily estimate the request value of an object. To do this, you need to know the value of net operating income( NOR) and the capitalization rate( K).
Formula for calculating the request value in one step
This system has a number of limitations
1. The direct capitalization system isn’t recommended when the property requires major addition or is in a state of construction in progress, i.e. in the near future it isn’t possible to reach a stable position of income.
2. In Russian conditions, the main problem faced by the reviewer is the” information nebulosity” of the real estate request, primarily the lack of information on real deals for the trade and parcel of real estate, operating costs, the lack of statistical information on the cargo factor in each request member in different regions. As a result, calculating the NOR and capitalization rate becomes a daunting task.
The alternate approach is relative.
It’s grounded on a direct comparison of the property being valued with other analogous parcels that have lately been vended. nearly everyone who vended or bought an apartment faced this approach. In this situation, we used information on offers of analogous apartments on the real estate request and, grounded on it, determined the request value of the apartment we were interested in.
Each time, conforming the price of an analogue object, we answer the question “ How important would this analogue cost if it had the same characteristics as the bone
being estimated? ”. adaptations can be both in chance and in financial units( chance and absolute adaptations).
The third approach is expensive.
The cost approach is grounded on the principle of negotiation, according to which the maximum value of real estate shouldn’t exceed the smallest price at which another object with original mileage can be erected.
The cost approach is used in the following cases
• on a par with the other two approaches, if there are no restrictions on its use, for a more complete final cost agreement,
• for special purpose objects for which there are no analogous deals,
• in a unresistant request, when there are no analogous deals,
• when assaying the stylish and most effective use of a free land plot.
relief cost( full relief cost) is the cost at current prices for the construction of a structure that has an original mileage to the subject property Valuation, but is constructed from new accoutrements and in agreement with ultramodern norms, design and layout.
Restoration cost- the cost in current prices for the construction of an exact analogue object using exactly the same accoutrements , norms, design and with the same quality of work, which embody all the failings, inconsistencies and fustiness as the object of assessment.