Valuation Methods

 The Market comparison approach uses the recent sale details of similar properties (similar in size, location and if possible, tenants) as comparables. This method is entirely conventional and often used in combination with the Income Approach.

Problem:

This approach is a good general method but does not take into account how your specific building is being used.

The Cost Analysis approach is not widely used. It determines a value for what it would cost to replace the property. Generally speaking, complex cost accounting systems require a lot of work on the front end, and constant adjustments need to be made for improvements.

Problem:

This complexity consumes time and resources and leaves room for misinterpretation.

The Capitalization Rate, more widely called the “Cap Rate,” is a ratio, usually expressed in a percent, calculated by dividing the Net Operating Income into the Price of the Property.

Problem:

The major problem with the Income Approach is the difficulty of selecting an appropriate capitalization rate. In addition, estimating the income and the operating expenses can sometimes prove difficult, and a slight error in either estimate is magnified on capitalization.

DCF used in valuing large properties like downtown office buildings or property portfolios is not simple, and it’s a bit subjective. Multiple year cash flow projections, assumptions about lease rates and property improvements and expense projections are used to calculate what the property is worth today.

Problem:

When forecasting cash flow, uncertainty increases every year in the forecast.