Land and Building Valuation Methods and Approaches
What this domain tests
This domain tests method selection and the arithmetic of reconciliation. You must know when sales comparison, income capitalisation, cost, residual and profit methods are appropriate, and how to adjust evidence to the subject.
Core rules
- Sales comparison: adjust comparable sales for rights, date, location, size, shape, frontage, condition and amenities. Adjust the comparable towards the subject; do not adjust the subject.
- Income capitalisation: value = net operating income (NOI) ÷ capitalisation rate. NOI is market rent less vacancy, collection loss and operating expenses; financing costs and income tax are excluded.
- Cost approach: replacement or reproduction cost new less physical, functional and external depreciation, plus land value. It is strongest for new or specialised buildings with no market evidence.
- Residual land value: GDV less construction, fees, contingency and developer profit. Profit method: for hotels, hospitals and cinemas, value the business and deduct operating capital.
Worked example
A comparable 250 sq m shop sold for ₹1.00 crore (₹40,000/sq m). Adjustments to the comparable: subject location is inferior, −8%; market movement since sale, +5%; subject condition is superior, +4%. Net adjustment = +1%, so adjusted price = ₹1.00 crore × 1.01 = ₹1.01 crore, or ₹40,400/sq m. A 200 sq m subject is indicated at ₹80.8 lakh, before any quantum or frontage adjustment.
Traps
Adding a percentage for depreciation without identifying its type; capitalising gross rent instead of NOI; using a cap rate from a different asset class; double-counting developer profit in the residual method; failing to reconcile methods and explain the weighting.