Valuation and Market
How Is a Home's Value Calculated? Comparable Sales, Cost, and Income Methods
The three core methods used in real estate valuation, when each one applies, and how a home's value is estimated.
2 min read
Appraisers use three core methods to estimate a home's value. For residential property, the emphasis is usually on the comparable sales method; the other two serve as supporting checks.
1. Comparable sales method
Prices of similar homes recently sold or currently listed in the same area are compared. Adjustments are made for the differences between the homes: size, floor, age, orientation, whether it's inside a residential complex, and so on.
- Strength: Produces the result closest to market reality.
- Weakness: Reliability drops without enough truly comparable sales; listing prices can run higher than actual sale prices.
2. Cost method
The land value is added to the building's replacement cost, then depreciation for the building's age is subtracted. It's used especially for properties with no comparables and for insurance valuations.
3. Income method
The rental income the property would generate is discounted to present value using a capitalization rate suited to the area. It's more common for rental-yield investments and commercial property.
How does data-driven estimation work?
Using a large number of listing observations, how the price per square meter varies with apartment characteristics can be measured statistically. This approach separates the neighborhood's price level from the apartment's own characteristics (age, floor, size, location), producing a numeric answer to 'what would an apartment like this be worth in this location.'
This content is for general information only and is not a substitute for legal, financial or tax advice. Rates, amounts and legislation can change over time. Confirm current information with the relevant authority or a professional before proceeding with a transaction.