Date: 21.11.2017

Valuation Methods?

Comparison of the Precedents (Market) Method :
Market Approach, relies firstly on a comparison of similar immovable properties that were sold in the market, and on the current price demand and bids; thus, the reaction the market shows towards the property under consideration is evaluated. In order to display the differences among the immovable properties during the comparison process regulations are generally made on currency unit or over a percentage of the real sales price of the immovable property. These regulations should be made in consideration of the functional, economic deviations, and physical variations. For example; an immovable property with poor foundation lay out, or an apartment next to a gas station cannot, without doubt, be compared with a property that does not have such negative aspects. Comparison of the immovable properties is the most frequently used rational method in establishing regulations.

It is evident that all immovable properties are unique; however, the final market value is determined by calibration of equals with the regional, physical, and location characteristics. The more the equal immovable properties there are the more the standard deviations are restrained in attaining the real market value. The basis of Comparison of Precedents Method necessitates comparison of similar properties in the same region in terms of age, maintenance, floors, heating system, elevators, parking lot, scenery, security, transportation, and social activity facilities; only thus putting forward the negative and positive aspects of a property are the market values determined.

Income Method :
This method considers the net income flow of an immovable property, in its remaining economic life, for an investor or a user. The income flow is compared with the income obtained from a similar immovable property and the possible gain to be obtained is compared with the gain obtained from similar immovable properties or from similar investments. Various techniques are employed to determine interest and capitalization rates to be used in reflecting of the approximate income flow, and the market value of the mentioned immovable property. In comparison of the immovable property with the similar properties, especially in terms of rent, the same basic physical, functional, and economic factors of the market approach are considered.

Income approach is frequently used when there is no sufficient amount of precedents determining the market value just like in the case of cost method. This approach relies heavily on mathematical formulas and the determination of numerous variables to be found with just comprehensive studies.

Cost Method :
In this method the rebuilding of the same structure under the prevailing economic conditions is taken as a basis for value assessment. In this respect, the main principle of the cost method can be explained in terms of usage value. The usage value is generally defined as “Every property has a value of its own, regardless of the fact that no one is interested in it or no one knows its value.”
In this method, it is assumed that the property has a long and important life expectancy. Accordingly, it is assumed that the property will lose its value due to physical erosion, functional and economic out-datedness in due time. In other words, it is assumed that the cost of an immovable will never exceed the rebuilding costs.

The value of an immovable property built on a piece of land, whose real market value is determined in accordance with the comparison of precedents or in accordance with the principles of income method, is determined by considering all the costs, special products, and systems, together with their erosion coefficients.

Value assessment of an immovable, whose value is determined in accordance with the comparison method, requires current expenses estimation that increases the cost of development, and an estimation of to what extent the developments yield before the amortization. The value determined in comparison with a precedent, after the deduction of the amortization costs, added to the market value of the immovable is an indication of the value of the immovable obtained through the cost approach. It tends to define the highest value for the new costs.

Value loss due to amortization should be taken into consideration in all of the three approaches. Information obtained from one approach can be used in other approaches. For example, the market value of an immovable determined by the comparison method, yields to an estimate value for the immovable in cost approach. Rental losses obtained from income approach generally forms a basis for value loss in the cost approach and even in market approach. The most effective argument in favor of these three concepts is: if there is no adequate market information in any of these, the information required may be found in another and in order to create a firm link the information found elsewhere can be associated with these three concepts for developing clear indicators to be used in value assessment. Thus, a great emphasis will be given to the concepts embracing more persuasive and factual information.