REAL ESTATE APPRAISAL METHODS

There are three methods of real estate appraisal.

Cost method of real estate valuation

Cumulative methods for assessing the value of real estate, based on determining the costs that are necessary to restore or replace it, taking into account accumulated depreciation. The cost approach to real estate valuation consists of the following stages: the value of the land plot is assessed as undeveloped; the full cost of reproduction is estimated; types of wear and tear of existing improvements are assessed; the costs of reproduction and land (replacement) improvements are added to obtain the value of the property being assessed.

Market method of real estate valuation - cumulative methods for assessing the value of real estate, based on comparison of the object of assessment with similar objects for which information is available on the prices of transactions with them. This assessment is needed for the secondary issue of shares of privatized enterprises seeking to increase their authorized capital by an amount supported by real material resources. This will allow investors to avoid mistakes when setting stock prices. Valuation is necessary when dividing property, determining the optimal commercial use of land and real estate, and in all other transactions related to real estate.

Income method of property valuation - cumulative methods for estimating the value of real estate, based on the determination of future income from the commercial use of the property being valued.

There are two methods for this assessment:

▪ profit capitalization method;

▪ discounted cash flow method.

These methods predict the amount of income and expenses for the operation of the facility during the forecast period, then divide the net operating income by the discount rate, which is a percentage of return on invested capital. The capitalization (discount) rate is determined by the appraiser in accordance with existing methods.

The capitalization method is used when there is sufficient data to forecast cash flow, current cash flow is approximately equal to future cash flows, and the expected growth rate of cash flow is predictable. It is applicable to income-generating facilities with stable, predictable amounts of income and expenses. The discounted cash flow method is used when future cash flow levels are expected to differ from current ones, it is possible to predict and determine future cash flows, projected future cash flows are positive for most forecast years.

The method is applicable to the most income-generating objects that have unstable flows of income and expenses.

Author: Kuznetsova S.A.

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