Valuation Approaches and Methods
Three Approaches, One Reconciliation
Candidates must command the sales comparison, cost, and income approaches and know when each applies. Sales comparison suits residential and vacant land; cost suits new or special-purpose property; income suits income-producing property.
Sales Comparison
Use paired sales and adjusted price per unit to derive adjustments. Adjustments are made for property rights, financing, conditions of sale, market conditions (time), location, and physical characteristics. Apply dollar or percentage adjustments sequentially and remember the order matters when using percentages.
Cost Approach
Replacement cost is the standard; reproduction cost is the exception. Subtract physical deterioration (curable and incurable), functional obsolescence (curable and incurable), and external obsolescence (always incurable). Add site value. A common trap is treating external obsolescence as curable.
Income Approach
Direct capitalization uses NOI ÷ rate. Gross income multiplier uses price ÷ gross income. Derive rates from comparable sales (band of investment or extraction). Know the difference between potential gross income, effective gross income (after vacancy and collection loss plus other income), and NOI (after operating expenses, excluding debt service and depreciation).
Worked Example
NOI $60,000, cap rate 8%: value = $60,000 ÷ 0.08 = $750,000. If the question gives gross income of $100,000 and a GIM of 9, value = $900,000. Do not mix NOI with a GIM-that is the classic trap.