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Methods of Real Estate Valuation

Real estate valuation is a crucial process in determining the worth of a property, whether it's for buying or selling purposes. It involves analyzing various factors such as location, size, condition, and market trends to arrive at an accurate estimate of its value. There are several methods of real estate valuation that can be employed depending on the situation, and each has its own set of advantages and disadvantages.

Direct Comparison Approach​

The direct comparison approach is one of the most common methods used in real estate valuation. It involves comparing a subject property with similar properties in terms of size, location, age, and other features to arrive at an estimate of its value. The process typically starts by selecting comparable properties that have recently sold or are currently on the market within the same vicinity as the subject property.

  • This method is relatively quick and easy to execute
  • It relies heavily on data from local real estate transactions
  • Can be influenced by external factors like changes in the neighborhood or economy

Income Approach​

The income approach, also known as the income capitalization method, focuses on the potential earnings of a property. This could include rental income, and is often used for properties that are currently generating revenue, such as apartments or commercial buildings.

  • Provides an estimate based on projected future cash flows
  • Can be influenced by factors like interest rates and economic conditions
  • Often more accurate for income-generating properties

Sales Comparison Approach (SCA)​

The sales comparison approach is another method used to value a subject property. It involves comparing the subject property with similar properties that have recently sold, taking into account differences in size, age, location, and other features.

  • Relies on recent sale data
  • Can be affected by changes in market conditions

Cost Approach​

The cost approach is based on the idea of valuing a property at its replacement cost minus depreciation. This method considers what it would cost to replace the subject property with an equivalent one, less any deductions for physical deterioration.

  • Useful when other methods are not feasible
  • Can be influenced by changes in market prices