Method of evaluation

Various methods of evaluation are used by appraisers. Depending on the case, they are used alone or combined, or some are given greater weight than others.
In certain difficult cases, the appraiser must also include his own instinctive appreciation (therefore involving his professional liability) where the usual methods cannot be used (see the paragraph "Special Cases" below: evaluation of atypical, single-purpose, polluted or damaged buildings) DIRECT COMPARISON METHOD

This is both the most common and the easiest method to implement.
It involves obtaining from the authorities or competent professionals, relevant reference prices for recent sales of buildings of a similar nature, substance, quality, location and condition, in order to determine the average value per square foot.
The direct comparison method therefore takes into account a set of positive, negative, quantitative and qualitative criteria present within the market for private sales, to determine the market value of real estate, such as: surface area, quality of the site and of the view, amount of sunlight, quality of the building, facilities and conveniences, condition of the premises and their purpose.
The appraiser therefore looks for common elements between assets that are similar or at least comparable, within the real estate market, in the sector in question.
This  theoretical average value is then applied to the assets to be appraised, taking into account their own characteristics.
This method is often used in combination with the direct comparison method by capitalization of income (to determine the theoretical average value).

CAPITALIZATION OF INCOME METHOD

This method involves taking into account what investors commonly consider to be a reasonable return on investment, for similar assets.
The theoretical asset value of the assets in question is therefore calculated based on the reasonable investment to be made in return for the recorded (or potential) income from the assets.
This method is used for assets that have been actually leased out (recorded income), or for which it is easier to find comparable assets within the rental market than within the real estate market.
This method is often used in combination with the direct comparison method, to determine the theoretical average value.
The income capitalization method can constitute a preliminary stage in calculating the legitimate return on investment, determined by means of the discounted cash flow (DCF) method described below.

THE PROPERTY DEVELOPER METHOD

The property developer method involves assessing the theoretical value of assets (end-of-life land or buildings), taking into account the likely return on investment from a real estate construction (and resale) operation, optimizing the land's urban development potential.
This method takes into account all of the expenses (purchase of the land, studies, demolition, eviction compensation, bank charges, construction, marketing, miscellaneous taxes etc.), compared to the potential revenues (sale price of the buildings).
The property developer method begins with a town planning study to determine the optimum surface area for development within the plot, and to determine the market value of the apartments or other assets that may be built on the plot.
The value of the plot (or of the buildings to be demolished) is then determined as a percentage, based on the theoretical gross surplus from the potential operation.
The land charge is the part of the investment allocated by the property developer for purchasing the land.

THE DISCOUNTED CASH FLOW (DCF) METHOD

The method based on future cash flow, known as Discounted Cash Flow (DCF), is very widely accepted for valuing assets, according to the principle that an asset's value depends on the income it generates.
This method involves using discounting to calculate the current net value of the future cash flows expected from direct use or rental of an asset, in particular a real estate asset or business.
In connection with a sale, the amount determined in this way corresponds to the price that the buyer would have to pay for a given investment in order for the investment to cover the cost of the capital (loans and equity capital) committed by the buyer.
One of the main attractions of this method is that it highlights all of the underlying assumptions behind the valuation (growth, profitability, investments) over a long period: the cash flow is modeled and then projected over the long term.
For a building or a real estate complex, the long term corresponds to a lifecycle (i.e. the period between two major renovations).
The DCF method of valuation can be broken down into four stages which, without being totally independent, correspond to the most important elements of the model. These stages are:

• Modeling the expected cash flow
• Estimate the normal flow
• Calculate the weighted average cost of capital
• Determine the value of the asset in question.

SPECIAL CASE: EVALUATION OF ATYPICAL, SINGLE-PURPOSE, POLLUTED OR DAMAGED BUILDINGS

Appraisers are often faced with the difficulty of having to evalue atypical or single-purpose buildings, where one or more of the above methods cannot be used.
The most common examples of buildings for which it is difficult to determine the market value are those that are not used within a genuine market economy, such as schools, hospitals and retirement homes.
These buildings are often located in areas where it does not appear possible to establish any other business, in view of the specific and single-function layout of the existing structures.
For example, appraisers face such difficulties during mergers or acquisitions of private clinics. In this case however, the DCF method is the most appropriate solution.
The most difficult cases are those concerning obsolete or single-function facilities, such as sewage treatment plants and disused or polluted factories. In such cases, appraisers mainly determine the theoretical value on the basis of their asset value.
These values are sometimes negative, after taking into account demolition, security and cleanup costs, etc.