The Cost Method – In this case, the value of the property is estimated by adding the price of the land to the construction, material, labor, and any other costs you’d incur if you built the exact home in today’s market. This approach is ideal for builders and special land use projects where not a lot of building is needed, such as a parking lot. Of course, when factoring costs, you have to consider depreciation and current market rates for materials and labor.

Sales Comparison Method – This involves looking at comparable homes in the same area that sold recently and finding out for how much they sold and how quickly. This works well in a stable housing market, but it’s hard to make a good comparison if the market is bouncing up and down. Once you see what other nearby homes sold for, you’ll need to add or subtract for any upgrades to or problems with the home you’re valuating. This is the method most often used in valuations of single family homes.

The Income Capitalization Method – Primarily, real estate investors take this approach to valuating properties. This method requires you to determine the property’s gross income and subtract all owner expenses except for the mortgage payments. The result will be the net operating income. Divide this number by the capitalization rate (cap rate) for your area. The net operating income divided by the cap rate will give you the maximum amount you should pay for the property.

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