Real estate is assessed using three methods: cost-comparative and income-generating. Refusal to use a comparative approach when valuing real estate must be justified by the appraiser. The impossibility of using the method is determined by the characteristics of the object.

The comparative approach is a set of methods for determining the market value of housing. This analysis is based on comparison of similar objects. They must have similar material, technical, economic and other characteristics.

Important! The use of the comparative method is allowed if there is accessible and reliable information on the price characteristics of similar objects.

To apply comparative analysis, similar units put up for auction are selected. This method is suitable for standard buildings. Comparing objects allows you to determine the most cost-effective cost.

The comparison method is suitable for registration of purchase and sale:

• Secondary housing;
• Land plot;
• Typical private houses;
• Rooms;
• Apartments in new buildings.

Real estate properties are valued by comparing the following units:

• Location;
• Technical parameters of housing;
• Cadastral characteristics;
• Number of storeys;
• House wear and tear;
• Year of commissioning;
• Land category (when comparing plots).

Refusal of the comparative method

The impossibility of using the comparative method is due to the following factors:

• The property was built according to a unique project, there are no analogues;
• There is no movement on the market for similar properties at the moment;
• The number of similar objects does not make it possible to conduct full market monitoring;
• The cost of analogue objects has a significant difference. It is impossible to select the correct average value.

Important! In this situation, the appraiser must use other valuation methods: profitable and costly.

Questions and answers

My father built a house according to an individual project. The appraiser clarified that it is impossible to conduct a comparative analysis of our house. How to conduct an assessment?

The appraiser's opinion is justified. The comparative method assumes the availability of a sufficient number of similar objects to determine the average market value. In this case, you can use other valuation methods, for example cost.

So, the valuation of real estate is the determination of its market price today upon sale or the cost of using this object, for example, at. Today, it is the income approach that is the main one in real estate valuation, much ahead of and. So what is the income approach, and how can you use it to determine the value of real estate?

The essence of the income approach

When using the income approach to real estate valuation, the appraiser calculates the value based on the expected profit it will bring in the future. It can only be used if the future income and expenses associated with the item can be accurately predicted.

To use this option in real estate valuation, the appraiser must:

1. Set the time frame for the forecast period. This time frame will be understood as a time period in the future for which, from the moment of assessment, calculations and forecasts of future income and expenses, as well as factors that may affect them, will be made;
2. Assess how much profit real estate can generate during the forecast time period. And also draw conclusions about the further flow of income after the forecast period;
3. Set discount rate. It is established in accordance with income-generating investments comparable to real estate that have a similar level of risk. This rate is needed to bring future profits to the time of assessment;
4. Calculate future income stream within the established time frame and after its completion, bring these data to the amount at the time of assessment.

There are several steps to help simplify the calculation of the income approach. Algorithm:

1. Gross income (IG) in this case, it is calculated on the basis of current, current tariffs and rates on the real estate market for similar objects.
2. Calculation of assessment losses from incomplete use of real estate or shortfalls in payments from tenants should be made on the basis of an analysis of a given market, in a certain territory, taking into account its dynamics and nature. The calculated figure must be subtracted from the gross income to ultimately obtain the actual gross income (GIR).
3. For the right determining costs, they should be divided into several groups and each calculated separately:
   • operating costs– costs associated with maintaining the facility;
   • fixed costs– those deductions that do not change over time, for example, depreciation, mortgage payments, tax deductions, and so on.
   • reserve costs- a certain amount that is needed in case of unplanned breakdowns or forced purchases.
4. Calculation net profit, received in case of sale of the object.
5. Rate calculation.

How to calculate property valuation according to the income approach

It can be produced in two ways.

1. Direct capitalization of income.

Attention! This option is used for long-term stable and fairly high profits. Or if profit increases constantly in equal shares.

The result of this calculation will be the actual total cost of the property.

C = CHOD/KK,

where C is the price of the object (expressed in monetary units);

CC – capitalization ratio (in percent);

NOR – net operating income.

So, then it turns out that the direct capitalization method comes down to bringing the annual NPV to the current value.

This option cannot be used if the profit is uneven and inconsistent or if the property is not yet owned.

The algorithm for calculating this method will be as follows:

1. Calculate how much net annual income the real estate will generate with its most efficient use.
2. Calculate the capitalization rate.
3. Calculate the price of the property using the formula.

1. (DDP).

It is more complex for calculations than the previous one. The method is applicable in the following cases:

1. difference in profit flows over a certain time period;
2. seasonality of income and expenses of the property;
3. the property being assessed is not one object, but a multi-level and multifunctional complex;
4. the object may be under construction or renovation.

The calculation algorithm for this method includes the following points:

1. Determining the time frame. The international standard in this matter is 5 – 10 years, within the Russian market – 3 – 5 years.
2. Calculation of expected cash flows.

To calculate expected flows, calculate:

• potential gross income;
• pre-tax cash flow;
• after-tax cash flow;
• actual gross income.

Using this method, the value of real estate is calculated:

PV – current value;

Ci – cash flow of period t;

It – discount rate;

M – residual value.

An example of the calculation of such problems can be the following situation. Let’s assume that the cash flow for 12 months at the end of the time frame was 200 thousand rubles, the discount rate was 26%, and the owner believes that at the end of the forecast time period, income growth will stabilize and amount to 4% per year. How much will the enterprise cost?

In this case, the future price of the enterprise will be determined using the formula:

In total, we find that at the end of the predicted time frame, the cost of real estate will be 909.1 thousand rubles.

Pros and cons of the income approach

The main and undoubted advantages of this method, of course, include the simplicity of calculations. Quite simple and optimized formulas help to carry out the assessment quickly and painlessly.

Attention! The second advantage is that this method helps reflect the market situation and shows it clearly. This happens because to evaluate real estate using this method, the appraiser must analyze a huge number of contracts and other documents confirming market transactions, review their amounts and make a conclusion.

This method also has several limitations:

1. Using this method cannot be used in times of crisis, since it is initially assumed that the profit will flow evenly and constantly throughout the entire time period. And an economic crisis may disrupt these payments, thereby affecting the income generated by the property in the future.
2. Also this method cannot be applied in conditions of lack of information. Its whole essence comes down to the analysis of processes occurring in the market and conclusions from them about obtaining future profits. If the appraiser cannot obtain this or that information or it simply does not exist, then this method cannot be applied due to the impossibility of making calculations.
3. This method cannot be used for a new business opening, since the level of his profit cannot be constant and has an abrupt form. It also cannot be used during the period of reconstruction or anti-crisis proposal of the company, since this data cannot be permanent.

Attention! This method is the most convenient only for those companies and firms in which profits come from evenly and constantly.

On what basis can one refuse the income approach to real estate valuation?

This method examines real estate objects from the outside and their attractiveness.

That is, what income can you count on in the future. Do not forget that without some data, for example, capitalization rates, or ignorance of the situation on the market, the percentage of reliability of the resulting future profit values ​​is significantly reduced.

The rules for applying the income approach state that you can rely on it only if you have complete and, most importantly, reliable information about the forecast of future income and expenses.

So, if during the assessment period the appraiser does not have this information or it is not in full, and therefore it is impossible to reliably predict future cash flow, then this may serve as a basis for refusing to apply the income approach.

There are other grounds for refusal. Firstly, it may be information provided by the owner of the real estate that the object will be used for residential purposes only, that is, it will be impossible to obtain any commercial benefit from this object, and, accordingly, it will be impossible to predict it.

Secondly, if the housing rental market is not developed in the city, and if it is developed, then it is underground, without registration and proper execution of contracts, and the appraiser cannot collect enough truthful information about the rental price, he also has the right to refuse this method. So it is always necessary to rely on reliable and truthful information.

Expert consultation

The video below is a clear and energetic presentation of the topic. Analyst Boris Gorodilov talks about the principles and necessary conditions for using the income approach.

In addition to the cost approach, comparative and income approaches are used in the valuation of real estate and other property. Comparative determines the price of an object by monitoring the real estate market, identifying analogue objects - similar in characteristics to the one being evaluated.

Profitable - takes into account all the nuances of the possibilities of using the object, considering investment prospects. In contrast to the listed valuation options, the cost approach is focused on determining the payback of a purchased or newly constructed building, as well as other real estate.

The main differences between the cost method of real estate valuation are as follows:

1. It is not focused on the return on investment in the facility and the prospects for its operation for commercial purposes.
2. It is basic in determining the extent of costs for the construction of a planned facility.
3. Does not rely on the value of buildings or premises with similar characteristics.

Just like alternative assessment methods, it is regulated by the provisions of Federal Law No. 135-FZ, adopted on July 29, 1998. In Moscow, separate provisions of the law adopted on February 11, 1998, No. 3, apply.

Features of application

To carry out calculations of the value of an object according to the principle of the cost approach in real estate valuation, it is not necessary to contact a specialist in the person of an independent appraiser with a license to perform these services.

If such an appeal is advisable, it is required to present a package of documentation reflecting the amount of costs for the acquisition or construction of real estate. If the acquired object was subject to reconstruction, which significantly improved its quality and increased its value, it is required to provide the costs of reconstruction and initial expenses for the acquisition.

In addition to determining and summing up costs, depreciation of the premises or building is taken into account, which is determined on the basis of inventory information about the object. And also – investments necessary to restore the useful properties of the object (if necessary).

When planning the commercial development of a site or zone of a settlement, it allows you to determine the prospects and amount of costs required for the work.

Independent calculations allow for approximations. But sometimes, when assessing a new building, they are extremely accurate. Advantageously, the owner can reconstruct from memory all the expenses invested in construction, even without the relevant supporting documents.

Advantages and disadvantages

The advantages of the cost approach in real estate valuation include:

• relative simplicity of calculations;
• not being tied to market conditions;
• availability of information for assessment.

When constructing industrial buildings, new buildings or retail space, it is the only possible method that allows consideration of potential construction costs.

However, even here a number of nuances are allowed that may force one to abandon the cost-based approach when assessing real estate in order to achieve certain goals of a person interested in purchasing real estate.

For example:

• the need for complete cost information;
• difficulty of use for old buildings;
• lack of information about prospects for use;
• lack of consideration of market trends.

In order to take advantage of the advantages and compensate for the disadvantages, it is advisable to also focus on other pricing methods.

Stages

The evaluation algorithm is based on a sequence of stages, each of which provides grounds for pricing the object. Among them:

1. Determination of cost land plot, if the land is owned. Rented plots are usually not taken into account, except in cases of commercial development of a populated area.
2. Summing up costs for the construction of a capital structure, taking into account the possibility of obtaining business profits by saving on construction subsidies, discounts received on building materials, etc.
3. Determining the degree of wear and summing up costs to restore the lost useful properties of the object.
4. Determining the difference between costs, costs incurred in the past and those required in the future.
5. Carrying out adjustments and amendments, which allows for reference to comparative market analysis and the profitability of acquiring an object.

Carrying out calculations and applying methods

The basic method of calculation is to sum up the costs of acquiring the site and developing it. If the object is newly constructed, with all the required communications, this may be sufficient.

Adjustments in this case are allowed when using the sales comparison method. For example, the cost of building material that was purchased by the owner of the building is compared with its current value, taking into account markups or inflation, which allows for profit.

If real estate is valued for commercial activity, it is necessary to contact a specialist who can apply income approach methods that determine the capitalization of rent when investing, taking into account replacement costs.

When determining the degree of wear, it is permissible to focus on the following options:

• inventory depreciation;
• comparative analysis;
• commission determination of wear.

Inventory assessment of wear and tear can be determined on the basis of accounting documentation or by conducting an inventory by a BTI technician.

The comparative analysis is focused on methods for calculating the cost of objects according to the year of commissioning. Commission determination of wear and tear is the most detailed method for determining the loss of useful properties not only of a building, but also of its elements. It is determined by a commission, which includes competent specialists, and is formalized in an official act.

After determining the degree of wear, the percentage of irreparable wear is taken into account, which is expressed in the loss of a proportionate part of the useful properties of the object. The cost of this part of the premises is deducted from the potential price of the property. Correctable wear and tear is calculated taking into account the costs required to restore their full functioning. Foreseen expenses are also subject to deduction from the potentially established cost.

When to use

In two cases, this pricing method has no analogues and requires unconditional application:

1. Assessment of planned construction for commercial purposes, using the maximum investment of the developer in the construction of industrial, commercial, cultural, sports or residential buildings.
2. Valuation of a newly constructed, completely unique building that has no analogues on the real estate market.

In other cases, its use is permitted at the discretion of the owner or buyer of the property. To assess outdated buildings with a high degree of wear and tear, it is advisable to abandon its use.

Conclusion. The cost approach focuses on the return on investment when constructing a capital structure or purchasing real estate. Based on costs already incurred and (or) planned.

2.13 Justification for not using the cost approach to valuation

In the process of working to determine the value of the appraisal object, I (hereinafter referred to as the Appraiser) came to the conclusion that using one of the three existing approaches (costly) is incorrect. Therefore, the Appraiser decided to abandon the use of this approach when calculating the value of the valuation object and use only two - comparative and income. Below is a brief rationale for this decision. The cost approach is based on the principle of substitution, which states that the buyer will not pay for real estate more than the amount that would need to be spent on acquiring a land plot and building on it an object similar in its consumer characteristics to the property being assessed, for example, an apartment in an apartment building. The Appraiser does not have an official estimate of the costs of purchasing a plot and constructing a building on it, of which the property being assessed is a part. In turn, calculations are based on “standard” estimates, SNIPs, etc. taking into account all real additional costs, determining the total depreciation of the building as a whole and “isolating” the cost of a unit of apartment area will lead to a large error in the calculations. In addition, the Appraiser is absolutely not aware of cases of such “sophisticated” acquisition of housing, when a private buyer acquired ownership of one apartment in an apartment building through its construction. Taking into account the weight of the above arguments against the use of the cost approach, the Appraiser decided to abandon its use within the framework of this Report.

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8. The sum of the current value of net profit with depreciation charges and the current residual value of the property is calculated.

Each of these methods leads to obtaining price characteristics of objects. Further comparative analysis allows you to weigh the advantages and disadvantages of each of the methods used and establish the final assessment of the property based on the data of the method or methods that are regarded as the most reliable.

2.13 Justification for refusing to use the cost approach to valuation.

In the process of working to determine the value of the appraisal object, I (hereinafter referred to as the Appraiser) came to the conclusion that the use of one of the three existing approaches (costly) is incorrect. Therefore, the Appraiser decided to abandon the use of this approach when calculating the value of the valuation object and use only two - comparative and income. Below is a brief rationale for this decision.

The cost approach is based on the principle of substitution, which states that the buyer will not pay for real estate more than the amount that would need to be spent on acquiring a land plot and building on it an object similar in its consumer characteristics to the property being assessed, for example, an apartment in an apartment building. The Appraiser does not have an official estimate of the costs of purchasing a plot and constructing a building on it, of which the property being assessed is a part.

In turn, calculations are based on “standard” estimates, SNIPs, etc. taking into account all real additional costs, determining the total depreciation of the building as a whole and “isolating” the cost of a unit of apartment area will lead to a large error in the calculations.

In addition, the Appraiser is absolutely not aware of cases of such “sophisticated” acquisition of housing, when a private buyer acquired ownership of one apartment in an apartment building through its construction.

Taking into account the weight of the above arguments against the use of the cost approach, the Appraiser decided to abandon its use within the framework of this Report.

2.14 Determining the value of the valuation object using a comparative approach

The basis for the application of this approach is the fact that the value of the subject property is directly related to the sale price of similar objects. Each comparable sale is compared to the subject property. Adjustments are made to the comparable sales price to reflect significant differences between them.

When using the comparative approach, the Assessor took the following steps:

1. collection of data, study of the real estate market, selection of analogues from among purchase and sale transactions and offers for sale (public offers);

2. checking information for each selected analogue about the selling price and the asking price, payment for the transaction, physical characteristics, location and other conditions of the transaction;

3. analysis and comparison of each analogue with the object of evaluation by time of sale (issuance of an offer), location, physical characteristics and conditions of sale;

4. adjustment of sales prices or asking prices for each analogue in accordance with the existing differences between it and the object of evaluation;

5. coordination of adjusted prices of analogues and output of an indicator of the value of the valuation object.

At the information collection stage, the Appraiser was unable to collect a sufficient amount of documented data on completed purchase and sale transactions of similar objects.

The reason was the widespread practice in Russian business of keeping such information confidential, i.e. lack of free access to databases (listings) where documented information on the terms of transactions for the sale of residential real estate is stored.

When performing a comparative analysis of the value of the valuation object with the prices of analogues, the Appraiser used data on prices of proposals (public offers) of similar objects taken from open sources (printed publications, official Internet sites, etc.). This approach, in the opinion of the Appraiser, is justified from the point of view that a potential buyer, before making a decision to purchase a property, will analyze the current market supply and come to a conclusion about the possible price of the proposed apartment, taking into account all its advantages and disadvantages relative to comparison objects.

In the absence of freely accessible databases (listings) with prices of real transactions, on which appraisers in most countries of the world rely in their work, the Appraiser rightly concluded that the data from public offers are closest to the real prices of purchase and sale transactions, and, therefore, in best meet the requirements of Russian legislation in the field of valuation.

Thus, in the calculation process, the Appraiser used data referred to in the Civil Code of the Russian Federation as “offer” and “public offer” (Articles 435 and 437). Consequently, the Assessing Officer hypothetically (subject to appropriate adjustments) assumed that the person “making the offer considers himself to have entered into a contract with the addressee who will accept the offer.”

At the time of the assessment, several analogues were offered on the market with the corresponding location and comparable in their main economic, material, technical and other characteristics with the object of assessment. Data on analogues was analyzed by the Appraiser and summarized in the calculation table below.

During the analysis, adjustments were made to the prices of analogues for the differences that exist between analogues and the object of evaluation. A negative adjustment is made if the analogue is superior to the object of assessment in terms of this indicator, and a positive adjustment is made if the analogue is inferior to it in terms of this indicator.

The amount of adjustment was determined by the Appraiser expertly.

Table for calculating the value of the valuation object

Index	Object of assessment	Analogue No. 1		Analogue No. 2		Analogue No. 3
	Sumskoy Ave., 12, building 3. m. "Chertanovskaya"	Sumskoy Ave., 8, building 1. m. "Chertanovskaya"		Chertanovskaya st., m. "Chertanovskaya"		Chertanovskaya st., m. "Chertanovskaya"
Price/vol. square/dol. USA
A source of information				Real estate agency "At the Red Gate"		Real estate agency "At the Red Gate"
Property rights	Ownership	Ownership		Ownership		Ownership
Adjusted price
Financing terms	Market	Market		Market		Market
Adjusted price
Terms of sale	Free sale	Free sale		Alternative sale		Free sale
Adjusted price
Market conditions	Open	Open		Open		Open
Adjusted price
Type of adjustment
	Panel	Panel		Panel		Panel
Offer date	April 2004	April 2004		April 2004		April 2004
Year the house was built
Total floors
Total area of ​​the apartment, sq.m.
Kitchen area, sq.m.
View from the apartment windows
Availability of a balcony/loggia	In stock	In stock		Absent		In stock
Condition and level of finishing of the apartment	European-quality renovation	European-quality renovation		Requires cosmetic		Requires cosmetic
	In stock	In stock		In stock		In stock
Heating	Central	Central		Central		Central
	Separated	Separated		Separated		Combined
Garbage chute	In stock	In stock		In stock		In stock
	In stock	In stock		In stock		In stock
Distance from metro	05 min. transport	05 min. transport		05 min. on foot		05 min. on foot
Presence of metal. doors	In stock	In stock		In stock		In stock
Entrance condition
Cost-indicator dollars. USA
Weight fractions