Valuation Principles and Methodology
Valuation methodology begins with the definition of value and the purpose, then selects the approach best supported by evidence. The three classical approaches are the sales comparison (market) approach, the income approach (capitalisation of net income, and discounted cash flow), and the cost approach (depreciated replacement cost). Each answers a different question and suits different property types.
Candidates must understand market value as the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm's-length transaction after proper marketing, where the parties act knowledgeably, prudently, and without compulsion. Key adjustments in comparison include time (market movement to the valuation date), location, size, condition, and transaction terms. In the income approach, understand net operating income, capitalisation rates, and the relationship between yield and risk.
Traps: applying a capitalisation rate to gross rather than net income; failing to adjust comparable sales for time; double-counting depreciation in the cost approach; and mixing bases of value. Another trap is using a method the evidence cannot support and presenting it as conclusive.
Rule of thumb: reconcile at least two methods where evidence permits, and state why the adopted figure is weighted as it is.
Worked example: A comparable sold 12 months ago for 1,000,000 and the market has risen 6%. Adjusted value = 1,000,000 × 1.06 = 1,060,000 before any location or condition adjustment.