1. Sales Comparison Approach (Market Data Approach)

What It Is:
This method, the Sales Comparison Approach, is a practical and widely used tool in the real estate valuation process. It compares the subject property to recently sold similar properties (called “comps”) in the same market. Adjustments are made for differences in size, condition, location, and amenities.

Ideal Scenario:

• Residential properties in active markets with plenty of recent sales.

Example:

• Subject: 2,000 sq. ft. home
• Comp A: Sold for $500,000, but has a pool (+$15,000 adjustment)
• Comp B: Sold for $480,000, but is 200 sq. ft. smaller (+$10,000 adjustment)
• Indicated Value: Around $490,000

2. Cost Approach

What It Is:
The Cost Approach is a versatile method that estimates the cost to replace or reproduce the property’s improvements, subtracts depreciation, and adds the value of the land. It’s a tool that can be applied to a wide range of properties, from new construction to special-purpose properties where comps are scarce.

Ideal Scenario:

• New construction or special-purpose properties (schools, churches) where comps are scarce.

Example:

• Land Value: $100,000
• Replacement Cost: $400,000
• Depreciation: $50,000
• Value = $100,000 + ($400,000 – $50,000) = $450,000

3. Income Capitalization Approach (you may review my article on the capitalization approach on my website)

What It Is:
Used for income-producing properties. Convert Net Operating Income (NOI) into value using a capitalization rate or discounted cash flow.

Ideal Scenario:

• Apartments, office buildings, retail centers—any property generating rental income.

Example (Direct Capitalization):

• NOI: $120,000
• Cap Rate: 6%
• Value = $120,000 ÷ 0.06 = $2,000,000

Comparison Table