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Real Estate Property – A Suitable Valuation Method

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    Analysis of Property/Real Estate Valuation Methods

    Real Estate Property Suitable Valuation Method: A property can be valued with different methods, and the result or value gotten from each of the methods will be fair in the market. One of the standard methods of valuing a property is the comparison method, which involves comparing similar properties.

    Other methods’ properties can be evaluated, which we shall discuss in this article. First, let’s find out what property valuation is and why you should find the value of your property – real estate.

    Analysis of PropertyReal Estate Valuation Methods 817 x 318

    What is A property valuation?

    Every home owner or company owner wants to get the right price from the sales of his home or company. For this to be done, the value of such property must be determined.

    Importance of property valuation

    Some of the importance of finding the value of your home or company are:

    • Finding the value of a property is not only beneficial to people who want to sell their property or buy. It is also essential to those that want to rent it out for a particular duration of time.
    • Property Valuation is a significant aspect of real estate property investment. Through a detailed and comprehensive property valuation, the market value of a property is determined.

    To get the correct value of your home or company valuation methods below should be used:

    1. Comparison Method

    As stated above, this is one of the common methods of determining the value of a property. It is also called the market data approach or sales comparison approach. It is used commonly in finding the value of properties such as shops, warehouses, houses, offices, and companies.

    Several property features must be looked into while using this valuation method to find the value of a real estate property. They include the size, location, and condition of the property. Then look for these features mentioned above in many similar properties and compare them to determine your property’s valuation.

    2. Profit Method

    This is a method of determining the value of a property when the property does not have comparable sales transactions or rentals. It is used often to find the value of hotels, bars, nursing homes, and restaurants rather than residential properties. It is a method used in finding a company’s net profit.

    3. Costing method

    Here, a property investor or potential buyer should not buy a property whose purchasing price is higher than building or rebuilding another similar property. This method is used for both commercial and residential properties. It is often used for properties built but not sold, such as hospitals, government buildings, schools, and religious institutions.

    4. Residual Method

    This valuation method is used on vacant land with development and redevelopment potential.  To determine such properties value, the calculation below is used.

    Land or property = Construction + Profit + Fees (Gross Development value). This means that the buying price, property, or land is determined from the GDV – Gross Development value.

    Real Estate Property

    The Right Valuation Method For Your Real Estate Property

    A search on Google on real estate valuation will give you articles supporting one valuation approach or the other. The possibility of getting confused will be there as you don’t know which one is good for your real estate property or not. One thing to keep in mind is that there is no best business valuation method.

    The process to evaluate a business depends on the company in question and what it incorporates, like location, etc. This article will consider two distinct real estate business valuation approaches you can use and their differences.

    Cost Approach

    This valuation method focuses on the amount needed to build a business from nothing – bare land. It includes the land’s value too. This approach is just to determine if building a new real estate property will be cheaper than buying an existing real estate property.

    There are two main methods of the cost approach, which are:

    Replacement method is the amount needed to rebuild the real estate property with new design, construction methods, and materials.

    Reproduction method – this is the amount needed to rebuild a replica of the real estate property with the same construction methods, same material, and under the same conditions.

    Sales Comparison Approach

    Having different market factors compared is essential for every method of valuation. Through sales comparisons, the cost of reproduction, which has been discussed, current rates of capitalization in the market, and loan to value ratios are derived from. This approach analyzes similar real estate property sold recently in the environment. Some of the components involved in this approach include:


    • Price per key – hospitality
    • Price per square foot
    • Location
    • Physical condition
    • Capitalization rate
    • Price per unit – multifamily
    • Tenant and income profile etc.



    If the compared properties have similarities in terms of condition, type, use, location, and the rest, the closer it is to get the fair market value of the subject real estate.

    Both the sales comparison method and the cost approach does not consider the potential return cash flow of an investor or potential buyer during the hold period of the real estate property.

    Discounted Cash Flow Approach

    The valuation methods that have been discussed above have their benefits in various situations with the same shortcomings. They only find a real estate value at a particular time. To fully understand why finding the value of a property at a specific time is a drawback, it is necessary to know how real estate investors calculate their expected returns during the period’s hold period.


    Suppose a real estate investor holds a real estate property for five years after buying. In that case, the return on investment will have the cash flow from the five years of owning the property plus the difference of the price the property was purchased and the selling price after the five years. Only this approach predicts or captures the property’s performance in the future.

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