Question

Usually the sales comparison approacjh to real estate appraisal is considered the most accurate method. Under what circumstances (and for what types of properties) would the cost or income approaches be preferred? Give examples.

Answer 1

The Sales approach is usually used in the cases where there are comparables or similar types of properties. The prices are calibrated based on similar properties and the value is appreciated or discounted based on availability of additional features or the lack of it. However, this approach predominantly requires the presence of these comparables. In cases where these similar comparables are absent in a particular area, sales approach would become difficult to incorporate. Hence, in such cases, cost approach is much more convinient. For eg. Considering hospitals or universities in a particular area, it is unlikely that we might be able to find such establishments with similar features, offerings or facilities. Therefore, cost based approach would become simpler for valuation.

On the other hand, for income generating establisments like malls or shopping complexes or office compexes, it would make more sense to value them by the volume of income they are able to generate, rather than the costs alone. Hence, in these kinds of establishments, inocme based valuation makes more sense.