12.2 Real Estate

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

12.2 Real Estate

Generally, to determine the value of real estate, one or more of the following three methods of valuation are used: (1) cost method, (2) market data method, and (3) income method. The estimates of value obtained from each approach are not averaged. Rather, they are reviewed to determine the applicability of each of the three approaches. For example, an apartment building, because of its income-producing nature, might be valued more properly by the income approach, whereas the market data approach might be more accurate for a residence and the cost approach more accurate for a factory.

12.21 Cost Method

In the cost approach, the value of the land is estimated (normally by the market data or income approach) and the depreciated reproduction cost of the building and other improvements is added to this value. The cost approach may be performed in the following steps: (1) estimate the value of the land as if vacant, (2) estimate the current cost of reproducing or replacing the existing improvements, (3) estimate the accrued depreciation from all causes, (4) deduct the accrued depreciation from the cost of reproducing the improvements to arrive at the indicated value of the improvements, and (5) add the value of the land to the value of the indicated improvements. For most types of property this method is less satisfactory than the other two methods; however, for some properties it is appropriate. The type of property will dictate the best method of appraisal.²

12.22 Market Data Approach

The market data or comparable sales approach is essential to almost every appraisal of real estate. This approach produces an estimate of value for a property by comparing it with similar properties that have been sold recently in the same or a similar area. The market data approach consists of the following...