Justification for abandoning the costly valuation method. What is the cost approach to real estate valuation and when is this method used? When is it necessary to stop using it? Selecting comparison items

7. The current value of the residual value of the property is determined.

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

In the process of working to determine the value of the valuation object, the Appraiser came to the conclusion that the use of cost and income approaches is incorrect. Therefore, the Appraiser decided to abandon the use of these approaches and use only one - comparative.

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, calculation according to “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 calculation.

In addition, the Appraiser is absolutely unaware of cases of such a purchase 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.

12. Refusal to use the income approach

The income approach is based on the expectation principle, which states that all values ​​today are a reflection of future benefits. This approach examines the property's ability to generate a specified income, which is usually expressed in the form of income from operation and income from eventual sale at the end of the holding period. In relation to the object of assessment, it can be assumed that it is purchased not as an “apartment for living”, but as an object for making a profit from renting it out and subsequent (possible) sale.

The Appraiser also had several arguments against using the income approach. First of all, this is information received from the Customer that this apartment will be used exclusively for residential purposes, i.e. the future owner does not plan to rent it out for the purpose of generating income.

Secondly, despite the developed housing rental market that exists in Moscow, it continues to remain largely “black”. In the vast majority of cases, lease agreements are not registered anywhere, and payment is made in the form of tax-free cash. This does not allow the Appraiser to collect a sufficient amount of reliable information about the amount of rent and rental rates for similar properties. The Appraiser considered it impossible to use information that did not have documentary evidence and justification. Therefore, the income approach was excluded from the calculations.

In the opinion of the Appraiser, the only possible approach to appraising an apartment in an apartment building out of the three existing ones can be considered a comparative approach, which, due to a well-developed information support system, gives the most objective results.

The income approach in real estate valuation is a method that is used in the following cases:

1. When the cost of a completely original building or premises is established, the costs of which are difficult to recover.
2. If the building or premises has a cost significantly lower (higher) than the market value.
3. When the acquisition of real estate promises benefits to the potential owner based on the accompanying characteristics of the urban or natural context.
4. When determining the return on investment in real estate.
5. When an object is purchased for commercial purposes, in accordance with its intended purpose, or is planned for resale after a certain period.

Valuation of real estate using the income approach, example: There is no object on the real estate market that reflects the properties of the building, apartment, etc. being evaluated.

In this case, it is difficult to monitor pricing due to the lack of analogues.

Or, the project was invested gradually, and taking into account inflation, it is difficult to restore the amount of financial investments.

The owner was able to construct a capital structure due to subsidies or other advantages, which significantly reduced costs, but allows for profit from the sale, based on market value.

Also, a land plot can be located in a zoning area of ​​a territory characterized by environmental advantages, or in an area of ​​active infrastructure development, which distinguishes it favorably from other plots.

The income method of valuation takes into account all related factors, which makes it one of the most popular.

Only with the help of the income method of assessing land and real estate is it possible to provide for the receipt of profit or loss when purchasing a building or premises, or a plot.

Its use allows you to reduce investment risks to a minimum or avoid them.

In accordance with the provisions characterizing this method of assessment, it is customary to apply it:

• when mastering the profitability of the real estate market;
• when selecting objects for real estate investment;
• for the presentation of objects in property transactions.

The rules and regulations for the application of the income approach are regulated by the regulations of the Federal Law on Valuation Activities in the Russian Federation, adopted on July 29, 1998, under No. 135-FZ. In Moscow, there are special standards adopted on February 11, 1998, No. 3.

For information on the methods of the income approach to real estate valuation, watch the video:

Stages

The calculation of the value of real estate occurs in stages, taking into account and using all the significant cost characteristics of the object:

IMPORTANT: Each stage is focused on the most profitable ways to use the purchased property. Therefore, it is not permissible to violate the required algorithm.

The income approach is most often used when valuing a land plot and when valuing income-producing real estate.

The listed stages can be classified according to characteristics:

1. Forecasting the volume of income from the acquisition of real estate.
2. Transferring the forecast results into the real value of the object.

Methods

The indicated approach consists of collectively applied methods, each of which makes it possible to identify significant features of the value of an object.

The basic methods are:

• direct capitalization method;
• income discounting;
• an equally effective functional analogue.

When using the income capitalization method, when valuing real estate, the estimated income that can be received from the investment is taken into account, based on the average statistical value.

This reveals:

• time of profit;
• profit volume;
• total income.

REFERENCE: The method of direct capitalization of income when valuing real estate and making calculations uses the accounting of the property owner, which reflects the financial flows of profit from the use of the property being valued.

When forming the amount of expected profit, the method of determining gross income is used.

It consists of determining the maximum amount of profitability of an object, focused on 100% use, without failures and unforeseen obstacles.

Not taken into account here:

• depreciation wear;
• operating costs.

Next, the gross income reproduction method is applied.

It takes into account the volume of contributions required for the normal operation of the operated structure, attracting profit.

For example, funds invested in major or current repairs and advertising costs when searching for tenants are taken into account.

It is allowed to attract credit funds for the purchase, which require the deduction of interest per annum. The income approach converts anticipated costs into potential profits..

After identifying the maximum profitability from the use of a building or premises, allowable losses are calculated, which consist of downtime, underutilization of the facility and its depreciation.

For example, when leasing premises, gaps are allowed between the functioning of commercial enterprises on the leased territory due to a change in the ownership of the lease. Also, areas can function partially, which does not bring profit, but does not reduce operating costs.

ATTENTION: Accounting for depreciation is to determine the wear and tear of a building or premises.

This concept, as used by appraisers, differs from inventory depreciation.

In this case, we mean the loss of useful properties of property, which does not allow it to be fully exploited and profit from it.

The acquisition of an object is accompanied by an actual determination of the wear and tear and functional condition of the building as a whole, as well as each of its elements.

For example, the acquisition of an object is accompanied by a preliminary examination.

As a result, a commission or an authorized specialist examines such fragments of the building as:

• facade, roof, foundation;
• internal parts of the building;
• separate rooms;
• ventilation holes;
• engineering Communication;
• adjacent land.

As a result of the inspection, removable and irreparable types of damage to the building are identified..

Irremovable types of damage to an object are taken into account as losses that prevent the exploitation of their functional properties.

The profitability of the enterprise is decreasing, which is considered by appraisers as the reason for a significant change in value downward. Removable problems are taken into account as additional costs that require commensurate investments in restoration.

Approaches to real estate valuation are also used here.:

• comparisons;
• capitalization of rental losses;
• calculation of the lifespan of an object (elements).

The results obtained are subtracted from the total profitability of the building or premises.

Discounting income focuses on the trade-off between the real benefits of owning money at the moment and the benefits that they will bring in the expected future.

In this case, priority is given to the present moment, which reduces the nominal value of the profit when making a transaction, with a deferment for the future. This means the need to reduce the calculated cost in a proportionate amount.

The method of equally effective functional analogue is equivalent to the comparative method.

That is, it is based on monitoring analogues in the real estate market, taking into account amendments to the specifics of the property being evaluated.

Refusal of the income approach to real estate valuation

The income method of real estate valuation is used when investing in real estate, taking into account the acquisition of profit.

If an interested person purchases residential real estate or sells an apartment or room, the use of this method of assessing the property is inappropriate.

Given the complexity of the calculations, it is possible to abandon the income approach when valuing commercial and non-commercial real estate.

If possible, it is replaced by comparative or cost. It is permissible to use their combination.

For example, sum up the entire amount of money spent on the construction of a capital facility or improvement of a plot of land.

Analyze the resulting value by comparing it with buildings or plots sold and for sale. If the market value exceeds costs, you can, based on market conditions, make a profit.

REFERENCE: It is advisable to evaluate standard apartments and other objects that allow comparisons when analyzing property transactions by analogy.

Sometimes the appraiser refuses to use this approach. Such cases arise due to the lack of documentation required for calculations. In these situations, there is no guarantee of the accuracy of the calculations, and a violation of the evaluation algorithm may distort the picture of the profitability of the proposed transaction.

Valuation of profitable real estate

The main advantage of the income approach in valuation is the most accurate determination of profitability.

For example, a purchased industrial building can be used for commercial purposes - for its intended purpose, as well as rented out.

Both uses of the building will generate profit.

The appraiser analyzes the expected profit from both uses of the building. In this case, the total amount of income from both types of enterprises is calculated and the duration of profitability of a particular type of operation is taken into account.

1. Compare two types of activities to attract profit from the use of an industrial building.
2. Find out the average statistical indicator, which will give an idea of ​​the average (total) type of income.
3. Conduct monitoring to compare the profitability of using this building with similar operating and profit-generating facilities.

After identifying the net profit that is allowed when using the object, the costs of its acquisition and maintenance are deducted.

Conclusion

The income approach is the most resource-intensive in the real estate valuation market. But it is precisely this that allows you to make extremely accurate and flexible calculations that determine the amount of profit from a property transaction.

If you are interested in the question of how exactly a building is valued, we can introduce you to one of the most popular approaches to home valuation - the costly method of real estate valuation.

In this article, we will look at all the nuances of this method, and also get acquainted with its stages.

Cost-based approach to real estate valuation: in what cases is it used?

The cost approach in real estate valuation is the total number of all methods that are used together to evaluate a particular property.

This method aims to establish the amount of costs that are necessary in order to restore the object in question or replace the property.

At all, a costly approach to real estate valuation is used when it is necessary to determine the wear and tear of a building.

As experts say, this approach is based on the principle of substitution, which assumes that a particular buyer, guided by available information, will not pay more for the building than the actual cost of the object under discussion.

Thus, we can draw a conclusion about in what cases a costly approach to real estate valuation is necessary and when it is used by appraisers.

This approach is necessary when it comes to secondary housing, when it is necessary to evaluate not only the ideal price of the property, but also to focus on the wear and tear of the property, as well as other nuances that have become noticeable over time.

This approach can be applied to both residential and commercial real estate.

Stages

If we talk about how the cost approach is carried out step by step in relation to deducing the value of a specific property, then here a number of sequential actions can be distinguished:

1. The first stage is to assess the market price of a specific property, including a plot of land.

   To determine the market value, a home appraiser conducts an analysis taking into account all factors related to the home.

   It includes both the infrastructure located around it and the presence or absence of repairs. In addition, the year of construction, location, and other equally important factors play an important role.

2. The second stage is the assessment of the work that is necessary for restoration, or rather an assessment of their value.

   Since we are talking about a building that has a certain percentage of wear and tear, it is necessary to understand that in order to put it in order, restoration work is necessary.

   The price of these works can vary, from the most insignificant amounts to significant cash injections.

   Since we are talking about the wear and tear of the building, the appraiser must also evaluate the identified types of wear and tear, as well as the total percentage by which the value of the property is underestimated due to the presence of this wear and tear.

Upon completion of the above stages, it is necessary to carry out a calculation, which will be the final price of the specific property taken. The property will be valued by taking actions to adjust the housing price, at the same time, the wear and tear of the building will be taken into account, as well as the necessary work that needs to be carried out in order to eliminate it and give the building a second life.

Methods of the cost approach in real estate valuation

As you have already seen, with the cost approach, several methods are used in combination, which allow you to most effectively evaluate real estate, as well as propose measures for its restoration:

1. The first and most common method for valuing housing using the cost approach is sales comparison method.

   It is based on obtaining information about what similar transactions were carried out in the near future, and what was the cost of real estate on the market.

2. Another, no less important method is distribution method. This technique is based on the fact that the appraiser determines the relationship between the price of buildings located on the site and the site itself.

   Thus, the price of real estate includes both the erected buildings and the cost of the plot of land itself.

3. Also, in the cost approach, it is used selection method. It is based on the fact that the appraiser collects all the information about today’s prices for land, buildings, and other real estate.

   Having information about the price, purchase and sale of specific objects, the appraiser can characterize the approximate cost of a new object.

4. Surely, real estate appraisers also use such a method as method of dividing into sections. This technique is used much less frequently than the above, but is also very effective in matters of the cost approach.

   This method requires a step-by-step approach, starting from dividing the site into specific sectors, and ending with actions to improve each of the sectors.

5. Land Remaining Technique and is not a common way to value real estate. However, this technique is used in situations where the appraiser does not have data on the price at which vacant plots of land were sold.
6. Since we mentioned the capitalization of land and buildings, this method cannot be skipped. From the capitalization of land rent, the value of a specific plot is determined by identifying the rent that relates to the land and is capitalized with a certain coefficient established for the region. In this case, it is necessary to take into account market data.

These methods of real estate valuation using the cost approach are the main ones, but this list is far from exhaustive.

Perhaps, with experience, appraisers use or, conversely, do not use some of the above methods, adding their own innovations to them, adapting them to their work.

Wear detection

Depreciation in this context means a decrease in the value of a particular object due to the fact that the building is not ideal for various reasons.

Such a concept as wear and tear can be measured both as a percentage and in price terms.

Of course, if we are talking about value, then it makes sense to talk about the depreciation of the object.

Also, many legal scholars say that wear and tear is a loss of usefulness of the building, which means the value will be reduced.

Let's look at how you can do this yourself.

1. We will need the following data:
2. Firstly, this is the cost of reproducing an object, the price of improvements carried out for a specific task.

Secondly, this is the full cost of reproducing a particular building, and this will be the full cost of replacing the object, in addition, we will need the amount of wear and tear of the object that was derived during the assessment. This method is quite complicated,

and when carrying out actions with the above units, not only a beginner, but also a professional appraiser can get confused.

This method can be based on analysis, as well as examinations of a specific structure.

The absolute value depends on the age of the object, to which the wear characteristic of a given age is equated.

Thus, you will need information about the physical life of the building, i.e. the date it was built, as well as data on the period of time that has passed since the building began to function, as well as the effective age, which can be calculated based on the chronological age of the building.

A simple use of data in a specific formula and you will get the approximate level of wear and tear of the building.

Examples with detailed descriptions

The cost method of real estate valuation is an example.

So, the desired object is the price of housing. In addition, we will need data on the specific cost of the plot of land on which the object is located.

We will also need data on the restoration price of the work, which are necessary in order to eliminate wear.

Since we are talking about this news, we will also need its value, which you can find using one of the above methods.

So, if the price of a land plot is 3,000,000 rubles, then we add it to the cost of restoration work, which, suppose, the appraiser estimated at 800,000 rubles. From this amount we subtract the amount of depreciation, which is 1,200,000 rubles. That is, the total cost of a specific property, according to the above formula, will be equal to 2,600,000 rubles.

Refusal of the cost-based approach to real estate valuation

Sometimes appraisers refuse to use the cost approach when valuing a specific type of property.

This happens for a number of reasons, but the most important thing is the rationale for such a refusal.

Most often, appraisers do not use this approach due to the fact that they do not have enough data about a specific property.

In addition, this approach is used when it comes to the deterioration of the building, and if it is minimal or not detected at all, then the costly approach simply cannot be applied.

In this case, the appraiser will be forced to turn to a different approach, for example, the income approach, which can consider the building from the point of view of attractiveness for attracting investment, and not as an object that, for one reason or another, may lose its original value.

Upon refusal of the cost approach, the appraiser must write the appropriate paper, where he explains his position in a motivated manner, and also justifies the use of a completely different method in his work.

Conclusion

Only a professional in his field can clearly understand which method will be used to evaluate a particular property; mistakes very often occur when the appraiser tries to evaluate the property at first glance.

However, real estate valuation using the cost approach is the most attractive case when it comes to secondary housing, as well as commercial real estate that has already been worn out over the years. In other words, pay attention to studying this method, since it will be useful in any case in the work of an appraiser.

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.

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.