Value is subjective. Every person has a different set of values and will therefore view and appreciate things in their own unique way. The value of a property is no exception and will vary depending on the perceived value of the property features, location, social institutions / ameneties in the area, wage levels, environmental legislation,etc. 

In general, there are 3 main approaches to property valuation. A proper appraisal normally comprises the use of at least 2 of the approaches.

The Comparable Sales Method

Also known as inferred analysis of property value, this method compares the value of a house by comparing it to the prices of similar properties sold in similar locations within a recent time period. The fair market value of a property is then estimated through adjustment of the prices for differences in date of sale, size, condition and location. With regards to the determination of the value of unimproved real property (land without significant buildings, structures or any other improvements that add to its value), there are numerous factors for consideration, including location, size, zoning or use restrictions, accessibility, road frontage, available utilities, water rights, riparian rights (right of access to and use of the water by owners of land on the bank of a river), existing easements, rights-of-way, leases, soil characteristics, vegetative cover, status of mineral rights and other factors affecting value. Only comparable sales having the least adjustments should be considered as comparable to the property.

The best way of collecting the data for comparison would be to personally inspect each property, which is time-consuming and might not be always feasible. In this case then property transaction databases will be useful and should contain information related to transaction date, price paid, property features and size etc.

As this method is easy and straightforward, it has become the general practice in the residential housing market. Moreover, the property valuation obtained will be objective and connected to actual market value instead of individual preferences. However, it is not always easy to find enough similar transactions for comparison and market prices can be affected by the actions of other people.

The Income Method

Also known as the fundamental or intrinsic method of property valuation, this method estimates the present value of a property based on a rate that represents a fair future income (eg. rent and resale value) and consideration of risks involved. A buyer uses this to determine the profitability of an investment. Essentially, the present value of an investment is derived using the discounted cash flow model.

The advantages of this method are that it represents the individual's valuation of the property and provides detailed and specific analysis due to the discounted cash flow model applied. However, this model is quite complex and does not reflect actual market prices for other comparable properties.

The Cost Method

Also known as replacement cost new or reproduction cost minus observed depreciation, this method estimates the replacement value of a property by analysis of the land and building costs. Being somewhere in between the above 2 methods, it is generally used for support purposes in setting the upper limit of value, especially in periods of rising costs. Basically, it is just a simple summation of the land's free market value as if vacant and the building reconstruction cost, less depreciation. The building reconstruction cost is determined using the materials, the quality of workmanship and the number of square feet or cubic feet in the building, which represents the total cost of labor and material, overhead and profit. Depreciation will be in terms of physical deterioration (the building's wear and tear), functional obsolescence (usually old buildings with inadequate lighting, plumbing, heating, small rooms, poor floor plan) and economic obsolescence (outside forces that reduces the desirability of the area).

The main benefit of this method is that the value of the property is set at the actual cost. However, the value of the land has to be derived using other methods and cost is not an accurate reflection of potential income generation.

Conclusion

At this point in time, there is no perfect method for property valuation, as it is both art and science. However, by employing the above methods, the buyer will be making a better informed decision when choosing a property to purchase.