Property Valuation: How is it Done?
There are 3 conventional ways to value a property
1) The Cost Approach
2) The Sales Comparison Approach
3) The Income Approach
In the Simplest terms 'The Cost Approach' lays out that the cost of a property is the ost of the structure added to the cost of the land on which it stands. To find the cost of a old property , we take the cost of a brand new identical structure and adjusted it for various depreciating factors we call obsolescence factors.
The Sales Comparison Approach has been commonly used to value residential properties. Here the cost of a property is arrived at by comparing it with the sale price of neighbouring or comparable properties adjusted for attributes such as age, location, condition amenities etc. The Income Approach values properties by adding up all potential future income of the property during its lifetime adjusted a discount factor such as projected inflation.
The income Approach is ideal to value commercial property, though I believe it is a good way to assess the value of residential property to see if you are paying too much. For a more detaled understanding do read the 'THE REAL DEAL' and 'NUGGETS of WISDOM' by A.Venkatasubramanian
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