2.2.2. Cost approach

The cost approach is based on the understanding that the buyers and sellers relate value to cost. In this approach the value of a property is derived by adding the estimated value of the land to the current cost of constructing a reproduction or replacement for what is already on the land; from this the amount of depreciation, that is for deterioration and obsolescence, is subtracted to give a net value. This approach is particularly useful in valuing new or nearly new improvements and properties that are not frequently sold in the market. Cost-approach techniques can also be used to derive information needed in the sales comparison and income capitalization approaches.

The current costs to construct the improvements can be obtained from cost estimators such as quantity surveyors, cost estimating publications, builders, and contractors. Depreciation is measured through market research and the application of specific valuation procedures. Land value is estimated separately in the cost approach.

2.2.3. Sales comparison approach

The sales comparison approach is most useful when a number of similar properties have recently been sold or are currently up for sale. Using this approach, an appraiser produces an estimated value by comparing the property whose value is sought with similar properties, called comparable sales. The sales prices of the properties that are judged to be most comparable tend to indicate a range in which the estimated value for the target property will fall.

An appraiser estimates the degree of similarity or difference between the target property and the comparable sales by considering various elements of comparison such as: real property rights conveyed; financing terms; conditions of sale; market conditions; location; physical characteristics; economic characteristics; use; non-realty components of value. Monetary values or percentage adjustments are then applied to the sales price of each comparable property with consideration for the real property interest involved. Adjustments are made to the sales prices of the comparable properties because the prices of these properties are known, while the value of the subject property is not. Through this comparative procedure, the appraiser estimates the value for a specific date.

Data such as income multipliers and income rates may also be extracted through sales comparison analysis. In the sales comparison approach, appraisers consider these data, but do not regard them as elements of comparison. These data are however applied in the income capitalization approach.

In countries in transition where there has been no market there may be few or no comparable properties. In such cases a best estimate must be made taking into account such matters as:

(a) Site location: topography, soil characteristics; usable land area; building setback requirements; end of road or corner location; view and landscaping; street and alley access; railroad and waterway access; available utilities; distance to shops, etc.; nearby nuisances (noise, pollutants); land-use zone;

(b) Building size: ground floor area; total floor area; leasable area; volume; building height; ceiling height; clear span: number of stories; number of apartments:

(c) Construction quality: quality of materials; workmanship; architecture;

(d) Construction materials: foundations; framing; floors; walls (exterior and interior); ceilings; roofs;

e) Other building features: number of rooms by type; heating, ventilation and air conditioning; plumbing facilities; fireplaces, etc.; additions and building extensions; porches and patios; swimming pools; shelters for motor cars; lifts;

f) Design: intended use: architectural style; shape of building; roof type; number of comers;

g) Age/extent of appreciation: chronological age; effective age; remaining economic life; condition; etc. [80].