Estimating the value of a real estate is a key element to real estate financing, listing for sale, property insurance, investment analysis, and taxation. For most instances, figuring the asking price of a property is the typical application of a real estate valuation. However, the methods and basic concepts remain the same for any application.

1. Real Estate Valuations

2. Introduction
Estimating the value of a real
estate is a key element to real
estate financing, listing for
sale, property insurance,
investment analysis, and
taxation. For most instances,
figuring the asking price of a
property is the typical
application of a real estate
valuation. However, the
methods and basic concepts
remain the same for any
application.

3. Value
Value is defined as the present worth of future
benefits from owning the real estate property.
Most goods are consumed quickly, but the
benefit of owning real estate is realized over
many years. Therefore, a valuation takes into
consideration the social and economic trends,
environmental conditions, and government
regulations.

4. Utility – the capability to satisfy a future owner’s needs
and desires
Demand – the need or desire for ownership supported
by access to finances that satisfy the need
Transferability – the ease by which the ownership can
be transferred
Value
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2
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The four elements that determine value are:
Scarcity – the finite supply of similar properties4

5. Appraisal
Methods
Cost Approach
Income Capitalization Approach
Gross Income Multipliers
Appraisal Method Approaches

6. Appraisal Methods
1) Cost Approach
The cost approach estimates the value of a real estate
that has been improved by additional buildings. This
method separates the value of the land and the
buildings, taking into account the depreciation. The
estimates are combined to determine the value of the
entire property. The cost appAroach assumes that a
reasonable buyer would not spend more for an
improved piece of real estate than it would cost to buy
a bare lot and build a comparable building. This
method works well when the property is a type that
does not come to the market frequently, such as a
church, school, government building, or hospital.

7. Appraisal Methods
2) Income Capitalization Approach
The income approach represents another common
method of real estate appraisal. This considers the
relationship between the net income of a property and
the rate of return that an investor seeks. Generally, the
income capitalization approach is used to put a value
on income producing properties including office
buildings, apartment complexes, and shopping centers.
This type of appraisal is straightforward when the
property has consistent and predictable revenues and
expenses.

8. Appraisal Methods
3) Gross Income Multipliers
The gross income multiplier method is used to value a
real estate that could become a rental property, such
as single-family homes or duplexes. The GIM method
relates the expected rental income to the sales price of
the real estate. For residential properties, the gross
monthly income is considered. For industrial and
commercial properties, the gross annual income is
considered.

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