Methods Used

Methods Used

  • Benchmarking Approach

  • Cost Approach

  • Income Deduction Approach

  • Project Development Approach


Benchmarking Approach

This comparative approach takes into account the sale of the similar or substitute properties, and the relevant market data, and performs valuation under a comparative transaction. In general, the property subject to valuation is compared with the sales of the similar properties carried out in the open market. The required prices and the bids given may also be taken into account.

Areas of use

  • It is the most appropriate approach to determine the value, in the event there is data.

  • If sufficient and reliable data can be found, it can be applied to any kind of real estate.

  • In our country, it has a wide area of use in terms of residence valuation.

  • It is not used to determine the value of the real estate built for special purpose. (For example; library, museum, mosque, school, etc.)

  • It is generally used in the valuation of the real estate (such as land) that does not generate income.

  • It provides the best indicators for the commercial and industrial properties used by the owner.

  • When valuating the historical data, the changes in the market behavior as from the emergence period of the data to this date should be taken into account. 

Challenges in Application

  • It is not easy to reach up to the real sales prices as it is difficult to find precedents sold in a certain period.

  • It is a method that is simple but not as easy as it is said.

  • There are also challenges in mathematicalization of the differences between the precedents. 

  • It is misleading to use it in such periods when the prices change so rapidly (volatile). 

  • It leads to faults in such environments when the data is insufficient.

Resources That May Be Used in the Method

  • Realized sales

  • Contracts

  • Offers

  • Official records

  • Information from real estate agents

  • Media: Information from newspapers/internet/real estate periodicals

  • Other valuation specialists

  • Auctions

  • Property managers

  • Archives of the valuation specialist  

Cost Approach

This comparative approach takes into account the possibility that the person can build exactly the same one or another property that shall provide the same benefit, rather than purchasing a particular property. In the context of real estate, it is normally not defensible for people to pay more for a similar property, rather than building equivalent land and alternative buildings, unless there is a lack of time, various drawbacks, and risks. In practice, the approach also includes depreciation for the old and less functional properties, in cases where the cost of the new one exceeds the possible price that can be paid for the real estate valuated in the value estimation to be performed.

The cost of rebuilding an existing building under the current economic conditions is considered as the basis for valuation of the real estate. In this regard, the main principle of the cost approach can be explained by the value of use.

In this method, the real estate is considered to have a significant remaining economic life expectancy. For this reason, it is assumed that the value of the real estate shall decrease over time due to physical wear, functional and economic obsolescence. In other words, it is assumed that the building value of an existing real estate can never be higher than the cost of reconstruction. This technique takes into account the calculations and costs that are performed considering the data such as the building cost values of the real estate, the Structure Unit Costs of the Ministry of Public Works, the technical characteristics of the buildings, the materials used in the buildings, the construction costs of the buildings constructed in the market with the same characteristics, the interviews with the contracting companies and the past experiences. The depreciation of buildings can be calculated by taking into account the visible physical condition of the building.

This technique assumes that the value of the real estate consists of two different physical phenomena as land and buildings. The land value is appreciated based on precedent approaches. The value of the buildings is determined through the methods specified above by way of deducting their shares of depreciation. The final value estimate is achieved by collecting these two values.

Areas of use

  • If the precedent sales information is insufficient,

  • In the benchmarking method, in the monetary corrections of some items,

  • When there is no comparable sales information,

  • When there is no income-generating property,

  • In valuation of properties that are not frequently traded in the market,

  • If the structures with special use are subject to valuation,

  • When there is an unconventional property or when it is traded very slowly,

  • In the valuation works of the projects that are unfinished or at the bidding stage,

  • Where the land and structures need to be valuated separately,

  • In case of additions and renewals,

  • In the feasibility studies,

  • If the income capitalization approach is not fully trusted.


Income Deduction Approach

This comparative approach takes into account the income and expenditure data of the property subject to valuation, and carries out the value estimation with the reduction method. Reduction is related to the income (usually net income figure) and the defined value type that converts the income amount into the valuation. This process takes into account the Revenue or Discount Rate or both of them. In general, the principle of substitution tells us that the income flow providing the highest return on investment at a given risk level shall lead us to the most likely value.

This approach supports two basic methodologies: Direct Capitalization Method and Income Capitalization Method.

In this method, the valuation specialist analyzes the future benefits and the production capacity of the property by modeling, and capitalizes the income using a current value indicator. The income and expenditure data of the property are taken into consideration during the works, and the valuation is carried out through the reduction method.  The principle of expectation is the basic element of the approach. The method also reflects the relationship between the sale price of the property and the expectation of rent.


  • The implementer should calculate the income, expense and gap estimates very well.

  • The choice of data of samples with the same income-expense expectations is required.

  • The rates of return should be selected from the properties with similar characteristics.

Cases not suitable for use

  • When there is no data that provide an appropriate and healthy measurable value

  • Non-revenue properties

Direct Capitalization Method

  • Direct capitalization (gross rental multiplier method), which establishes the relationship between the annual cost and the cost to come to a conclusion

  • Total Annual Income x Self Amortization Time of the Property = Value or

  • Total Annual Income / Capitalization rate = Value

Common mistakes

  • Including only the rental incomes within a year, rather than the total potential gross income,

  • In practices of rentals with “basis rent + turnover”, making the analysis without including the turnover percentage in the rent amount.

  • Without considering whether or not the comparable properties have comparable capitalization rates,

  • If there are areas used by the building owner, the fact that they are not included.

Income Return Capitalization Method

It is the capitalization of return that calculates with an appropriate return discount rate, in which the potential income sources, cash flows, vacancy-rent losses over time are included, the operation expenses are deducted, and the re-sale revenue is included in the investment. In the approach, perspectively, when the Current market prices and the expected changes in the market; the Current base rent and contractual lease adjustments; the Renewal options; the Current and expected expense refund conditions, the Tenant changes; the conditions of the New lease contract, vacancy rates, subsidies to tenants, if any, property preparation costs for the tenant, lease commissions, the Operating expenses, the Discount rate, the Income capitalization are calculated through both methods, it should produce similar value indicators.


Project Development Approach

With respect to the real estate, one or more development project models are applied. The projects that can be developed on a planned project and/or plot are supported and modeled based on assumptions. Modeling should be legally feasible, financially possible, economically efficient to the utmost, that is to say, “it should be the best and most efficient use”. The project is examined by the entrepreneur. The current situation in the sector of the subject product and the expectations for the future are examined and evaluated. In the event that the project is carried out, an income-expense estimation is performed regarding the total return and expenses by estimating the future expenditures and taking into consideration the marketing policies and the general feasibility principles of the company. In case of realization of the project, assumptions are made with respect to project within the framework of the general situation of the sector, the statistical figures of the similar projects, and the current economic conditions and expectations. In the conclusion part; the value is achieved by carrying out a project performance estimation, and calculating the net present value of the project through the method of income reduction.

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