What are the three main approaches to property valuation?

The three main approaches to property valuation are sales comparison, cost, and income, which are widely recognized methods used in appraisal practice.

The sales comparison approach involves evaluating similar properties that have recently sold in order to estimate the value of the subject property. This method is particularly effective in residential real estate, as it reflects how the market values similar homes based on features such as location, size, and condition.

The cost approach focuses on determining what it would cost to replace or reproduce the property, adjusting for depreciation. This method is useful for new constructions and special-purpose properties, as it emphasizes the cost associated with creating a similar asset while considering the value loss over time.

The income approach is predominantly used for investment properties. It involves assessing the income-generating potential of the property, typically through the calculation of net operating income and applying a capitalization rate. This approach is crucial in the commercial real estate sector, where investors are primarily motivated by the income yield of their investments.

Together, these three methods provide a comprehensive framework for valuing real estate, allowing appraisers and real estate professionals to arrive at an accurate value reflecting the property’s worth in the current market.