What is the Sales Comparable Approach or Market Approach?

The Sales Comparable Approach or just Comparable Approach or Market Approach valuation method takes into consideration the recent transaction data of:

  • Recently sold similar properties from the same location
  • Recently sold similar properties from similar locations
  • The value of a property is adjusted for its characteristics

This method is popularly used by real estate agents as well as by appraisers to evaluate properties that are up for sale.

Can you please explain this with an example?

If there is a house for sale, an appraiser will compare it to other similar houses sold in the same neighborhood within the last few months earlier. The prices are to be suitably adjusted for land area, number of bedrooms, parking, garden, its location on the main street, etc.

If the quoted price for the property is higher than that of other similar properties, the seller may have to be open to negotiation.

On the other hand, in case the price of the comparable property is found to be higher, the seller can demand a higher price.

In this example, we have taken into consideration a house. However, the comparable approach works for lands and in some cases commercial & other properties also.

What is the time frame taken into consideration for this price comparison?

Not more than 1 year. In the case of similar properties sold over a year earlier, their prices may have to be adjusted for a time before these can be used. Appraisers normally seek to refer to only the latest market data.

What is the Cost Plus approach?

This is another important, yet interesting property valuation method. It takes into consideration the cost of the existing property, which includes the value of the land plus the construction costs minus any depreciation for age as appropriate.

What are the factors taken into consideration for the cost approach?
  • Value of the land
  • Cost of construction incurred while building the existing property
  • Statutory planning obligations
  • Depreciation for age
What do you mean by value of the land & construction costs?
  • Value of the land - the current market rate of the land derived from the comparable approach explained earlier.
  • Construction cost - the cost incurred for building the structure of the property
  • Depreciation – Property value (especially the construction value) depreciates with time due to normal wear and tear. Thus, an appropriate depreciation must be applied depending upon the age of the property and its regular upkeep.
What is Income Approach?

In this methodology, property valuation is calculated in 2 ways:

  • Estimating the rental income an investor can expect from that property per year
  • Applying a suitable multiple to this yearly rental income. This multiple is benchmarked to the multiple applied to the rental income of similar properties in similar locations. This is why it is called the income capitalization approach.
How can we explain it further?

For instance, you purchased a building for $1 million, and you are expected to generate a yearly rental yield of 5%, based on local market research.

Going by this theory, you can expect a yearly income is around $50,000. Thus, the 5% annual rental yield benchmark can be used to generate values of similar properties in similar locations.

Is it possible to estimate the rental income you can get from the building without leasing out the property?

Yes, it is. With the Estater Meter, a comprehensive tool that helps you calculate the market rate of any property, you can generate potential rental income based on local market research.

What are the recurring expenses I must take into consideration?

As the owner of the building, you must estimate the following recurring expenses:

  • Annual maintenance
  • Water
  • Power
  • Security
  • CCTV or any other electronic surveillance
  • Minor repairs to the structure in case of leakages during rains, plumbing work, replacement of lights, and other miscellaneous expenses.

Many of these expenses can be passed on to tenants.