Real Estate Valuation Methods

1. Direct comparison / comparison method

This method is based on the prices of real estate with similar properties that are already on the market. This is the method commonly used in many countries around the world and in Vietnam.

Pros: Easy to apply, simple and recognized for being based on market prices.
Defect:
• It is imperative to gather complete information about transaction history.
• It is difficult to find an asset being traded on the market that is exactly the same as an appraisal asset.
• Comparative approach based on real estate valuations similar to real estate appraisal
• Comparative approach based on real estate valuations similar to real estate appraisal

2. Capitalization method (also known as collection method or investment method)
This method is based on determining the average annual net income from a property. Based on the use of an appropriate capitalization rate, that income can be converted to determine the value of the asset under evaluation.
Advantages: Simple, easy to apply.
Disadvantages: Determining the exact capitalization rate is quite complicated, depending on the subjective will of each individual.

3. The cost method (also known as the cost method)
This method is used to value real estate that has no, or very little, trading on the market (schools, churches, hospitals, ...).
Based on the real estate replacement principle, the cost method allows for asset assumptions. That means the value of an existing asset, will be measured by the cost of making a similar asset plus the current cost of construction.
Pros: Applicable to individual properties, no comparable market data available.
Defect:
• Depreciation cost of construction is subjective.
• Price appraisers must have experience with each asset.
• The cost method allows to assume alternative real estate
• The cost method allows to assume alternative real estate

4. Accounting method (also known as the profit method)
This method is commonly used for the valuation of specialty properties. Include: Hotels, movie theaters and valuable real estate dependent on profitability in the future.
This method is based on an analysis of the profitability estimated from use. The profitability value minus the expenses from business management, the remaining balance is the annual net income of the real estate.
Advantages: Simple, easy to apply.
Defect:
• Applies only to properties with profitable activities.
• It is difficult to determine the capitalization rate.
• Real income level may not match estimated earnings.
• The assessor needs in-depth knowledge.

5. Surplus method (business analysis method)
This method is a form of cost method. Usually applied to real estate not based on the current use but based on the planning, future use purposes.
Valuation value is estimated using the following formula:
Asset valuation = total expected revenue from real estate development - expected total costs incurred.
The hypothesis method is commonly used to evaluate real estate development potential.
Advantages: Applied to calculate the capital value of real estate development potentials.
Defect:
• All pricing and cost assumptions are subject to change based on market conditions.
• Skills, knowledge and experience are required to estimate all of the different investments.
• Does not take into account the value of money over time.