An overview of valuation methods: The cost approach

The asset-based valuation method: determining market value based on construction costs and land value

The asset value method is an important method for determining the market value of property, particularly for owner-occupied single-family and two-family houses. In this process, the value of the land is determined separately from the value of the building erected on it. Ultimately, the sum of these two values gives the market value.

Determining the land value

The land value is usually determined using the comparative market approach. In this process, valuers draw on data from local valuation committees to determine the value of the plot of land based on comparable sales. The location, the size of the plot and the standard land values play a decisive role in this process.

Calculation of the building’s value

When determining the value of a building using the asset-based approach, the focus is on the notional construction or reconstruction costs. The question is: what would it cost to rebuild the building to the same standard and size?

• Cost of production: Construction costs are calculated on the basis of tables and empirical figures. A middle-block terraced house is usually cheaper per square metre than a detached house.
• Facilities and outdoor areas: Factors such as garages, terraces or garden areas increase the value, provided they are of a high standard and offer good potential for use.

Wear and tear and modernisation

Depreciation is deducted from the calculated construction costs. A total useful life of 80 years is usually assumed for residential properties. For each year of age, approximately 1.25 % of the building’s value is deducted. However, owners can halt or reduce this loss in value through extensive modernisation, for example by replacing heating systems, fitting new windows or adding balconies.

Take the market adjustment factor into account

Once depreciation has been deducted and factors such as damp cellars or a backlog of renovation work have been taken into account, the so-called market adjustment factor is applied. This reflects current demand and market conditions. A flat in a structurally disadvantaged region is valued differently from a comparable property in a sought-after city centre location.

Conclusion

The cost approach provides a realistic market value by taking into account construction costs, the condition of the building and local market factors. It is particularly suitable for properties for which there is little comparative data or where the quality of the property for owner-occupation is the main consideration.

Your contact at FLEXMAKLER
Robert Schüßler
Property valuer (EIA and IHK)