Approaches To The Assessment

Here are three approaches to the assessment:

Income approach:

A pair of ways for assessing the worth of the home being valued, dependent on the dedication of the likely earnings out of the usage of the home being valued.

The income approach is used when there is reliable information that allows you to predict future revenues that the object of valuation is capable of generating, as well as costs associated with the object of valuation. When applying the income approach, the appraiser determines the amount of future income and expenses and the moments of their receipt.

Applying the income approach to valuation, the appraiser should:

  1. a) Set the forecast period. Under the forecast period is understood the period in the future, on which from the valuation date, the prediction of quantitative characteristics of factors affecting the amount of future income is made;
  2. b) Investigate the ability of the subject of valuation to bring in a stream of income during the forecast period, and also to make a conclusion about the ability of the object to generate a stream of income in the period after the forecast period;
  3. c) Determine the discount rate, reflecting the profitability of investments in investment objects comparable to the object of assessment at the risk level, used to bring future income streams to the date of valuation;
  4. d) Implement a procedure to bring the stream of expected revenues in the forecast period, as well as income after the forecast period to the cost at the valuation date.

Comparative approach:

A  set of valuation methods for the valuation of the valuation object, based on a comparison of the valuation object with the objects – analogues of the valuation object, for which price information is available. An object – an analogue of an object of valuation for the purposes of valuation is an object that is similar to the object of valuation in terms of its basic economic, material, technical, and other characteristics that determine its value.

Comparative approach is used when there is reliable and available for analysis information about prices and characteristics of analogous objects.

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Applying a comparative approach to valuation, the evaluator should:

  1. a) Select units of comparison and conduct a comparative analysis of the object of evaluation and each object-analogue for all elements of the comparison. For each object-analogue can be selected several units of comparison. The choice of units of comparison should be justified by the appraiser. The appraiser must justify the rejection of the use of other units of comparison adopted during the assessment and related to the factors of supply and demand;
  2. b) Adjust the values ​​of the unit of comparison for objects-analogues for each element of the comparison, depending on the ratio of the characteristics of the object of assessment and the object-analogue for this element of comparison. When making adjustments, the appraiser must enter and justify the scale of adjustments and provide an explanation of under what conditions the values ​​of the introduced adjustments will be different. The scale and procedure for adjusting the unit of comparison should not change from one analogue object to another;
  3. c) Agree on the results of adjusting the values ​​of the units of comparison for the selected objects-analogues. The appraiser must substantiate the scheme for reconciling the adjusted values ​​of the units of comparison and the adjusted prices of analogous objects.

The cost approach is a set of methods for estimating the value of the property being valued, based on determining the costs necessary for reproducing or replacing the property being valued, taking into account depreciation and obsolescence. The cost of reproduction of the object of evaluation are the costs necessary to create an exact copy of the object of evaluation using materials and technologies used in the creation of the object. The costs for the replacement of the object of evaluation are the costs necessary to create a similar object using materials and technologies that are applied at the valuation date.

The cost approach is used when there is a possibility to replace the object of evaluation with another object that is either an exact copy of the object of assessment or has similar useful properties. If the appraisal object is characterized by a reduction in cost due to physical condition, functional or economic obsolescence, the use of the cost approach must take into account depreciation and all types of obsolescence.

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