Real Estate Valuation Methods

Study Notes

The appraiser infers the current value of the subject property from the adjusted sales prices of comparables.
The sales comparison approach relies on the availability, accuracy, completeness, and timeliness of sale transaction data.
Sources of data include government records, data vendors, and the appraiser's network of local contacts (e.g. brokers participating in transactions).
The comparable sales analysis procedure is a four-part process:
- Finding the most comparable sales for a given subject property.
- Adjusting the selling prices of the comparables to match the characteristics of the subject.
- Using the several estimates of value to arrive at an estimate of market value.
- Presenting the results in a report format.
The process of finding comparables utilizes "distance" to establish a measure of comparability between the subject and the comparable under consideration.
The distance, D, is calculated by weighting the differences in characteristics between the subject and the comparable.
Adjusted selling prices are obtained for each comparable property, and a weighted estimate is formed.

At its simplest level, the comparable model can be used to determine capital value directly.
Property is viewed as a unit of production, and it is the valuer's role to assess the economic rent for the property from first principles.
Cash flow is determined by factors such as the number of bedrooms in the hotel, the room rate, and the average occupancy rate for the year.

This method calculates the potential revenue expected each year from the hotel and deducts all other costs of a prudent hotelier.
Costs include direct costs (e.g. catering, laundry, and service), remuneration of the hotelier, interest on borrowed money, and a return on capital for equity tied up in the business.
The residue is an estimation of the economic rent for the property.
The capital value is derived by multiplying the annual rent by an appropriate multiplier.

This method is used for plots or sites that can be developed.
The best method for estimating site value is through comparable vacant land sales.
Sales should be reduced to appropriate units of comparison.

Market value equates to reconstruction costs.
The valuer assesses the market value of the raw land (by reference to comparable land values in an alternative use) and adds the cost of rebuilding a new building.
Subjective adjustments are made to allow for the obsolescence and depreciation of the existing building relative to the new hypothetical unit.
This method mirrors the thought process of the owner-occupier and is a valid and rational method of valuation.