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Valuation Property Methods

October 29, 2010 | In: appraisal appraiser

In Indonesia , There are 3 (three) valuation methods commonly used in the valuation of any property that is: Market Data Approach, Cost Approach, and income Approach. The third application of the above methods depends on type of property being valued and objective assessment. For certain cases the valuation of a property can involve several methods before the final result obtained. The three assessment approaches are explained as follows:

Market Data Approach

This approach considers the sale of similar or substitute properties and related market data, and generate the estimated value through the comparison process. In general, the subject property (object assessment) compared with transactions of comparable properties, those that have occurred as well as property sales are still in the bidding phase of a process of buying and selling (KPUP

Cost Approach

This approach considers the possibility that, as a substitution for the purchase of a property, one can create another property in the form of a replica of the original property or substitutes that provide comparable functionality. In the context of real estate, someone is usually considered not reasonable to buy a property more than the cost to purchase comparable land and create an alternative development, but would involve a longer period of time, inconvenience and risk higher (KPUP

The approach involves the estimation of the cost of depreciation for older properties and / or has a functional obsolescence which estimates the new fees unreasonably exceed the price that may be paid to the subject property.

Depreciation is a special study in the appraisal, covering all aspects of the causes of shrinkage, which can be categorized as follows:

a)      physical deteriorations, namely the use of depreciation due to age, condition and maintenance of use, wear and physical damage to others

b)      obsolescence’s functional, namely depreciation arising from the changes / developments in technology, errors in planning that resulted in excess capacity or less, and others

c)      obsolescence’s economical, the shrinkage due to factors outside the asset itself, such as changes in government regulations, changing demographics, changing consumption patterns, and others.

Income Approach

This approach considers the income and expenses related to the subject property and the estimated value through the capitalization process. Capitalization linking income (usually a net income) with a definition of the type of value through conversion of income into value estimates (KPUP

The rationale of the Income Approach is that the market value of any property depends on the potential of a property to generate revenue. There are four methodologies commonly used in the income approach, among them is the Gross Income Multiplier (GIM), Direct capitalization, Discounted Cash Flow (DCF) and Residual Technique.

If the net income per year is considered stable during the operational period and is infinitely or continuously, the net income generated in a given year by a property can be capitalized directly into the value of the property in question during the capitalization rate used is the capitalization rate (yield) generally accepted in the property market in question and this method is called Direct Capitalization.

If the income from the subject property cannot be fixed, the assessment can use a discounted cash flow method, or better known as Discounted Cash Flow (DCF). With this approach, the market value of a property is a present value of the Net Operating Income will be earned from property operations.

Results by Income Approach valuation is the value of all the assets that have a direct contribution in operations such as land, buildings, facilities, machinery and equipment and is an integral and inseparable.

If each approach applied in the estimation of market value, all elements of this approach is based on market data (SPI 1.1.4).

6 Responses to Valuation Property Methods


November 2nd, 2010 at 8:30 am

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