Estimation Models

Real estate estimation relies on multiple models tailored to specific property types and estimation goals. The four major models—Market Comparable, Income, Cost, and Discounted Cash Flow (DCF)—offer varying strengths depending on the use case.

1. Market Comparable Model

Also Known As: Sales Comparison Approach

Best Suited For: General property types, residential homes, commercial and mixed-use properties, properties for sale or rent, listing and rental estimations.

Use Case and Application: Compares the subject property to recently sold or rented similar properties. Adjusts for differences in features, size, and location.

Advantages:

  • Simple and widely understood
  • Reflects current market behavior
  • Effective with active markets and recent transactions

Limitations:

  • Ineffective in unique or illiquid markets
  • Does not account for intrinsic value
  • Dependent on accurate comparables
2. Income Model

Also Known As: Income Capitalization Approach

Best Suited For: Income-generating properties such as rental apartments and commercial buildings.

Use Case and Application: Calculates the present value of expected income by capitalizing net operating income (NOI) using a market cap rate.

Advantages:

  • Focuses on return on investment
  • Preferred by investors and lenders
  • Good for comparing investment-grade assets

Limitations:

  • Sensitive to inaccurate income/expense data
  • Requires reliable cap rate data
  • Not suitable for non-income-producing properties
3. Cost Model

Also Known As: Cost Approach

Best Suited For: New or special-use properties, insurance estimation, properties under development or with few market comparables.

Use Case and Application: Calculates replacement/reproduction cost minus depreciation, then adds land value.

Advantages:

  • Useful with limited market data
  • Ideal for insurance and feasibility assessments
  • Objective value base when income/comps are unavailable

Limitations:

  • May not reflect market sentiment
  • Difficult to estimate depreciation
  • Less suitable for older/income-producing properties
4. Discounted Cash Flow (DCF) Model

Also Known As: Investment Approach

Best Suited For: Investment properties with stable income and long-term value potential (e.g., commercial buildings, REIT assets).

Use Case and Application: Forecasts future cash flows over a holding period and discounts them to present value using a risk-adjusted rate.

Advantages:

  • Detailed financial insight and risk analysis
  • Captures time value of money
  • Ideal for institutional investment decisions

Limitations:

  • Requires accurate forecasts and assumptions
  • Complex and data-intensive
  • Highly sensitive to input variables like discount rate

Summary Table of Suitability

Estimation Model Best Suited For Purpose
Market Comparable General properties, residential sales/rentals Sales listing, rental pricing, taxation
Income Model Rental and income-generating properties Investment estimation, mortgage appraisal
Cost Model Insurance, development, and unique properties Replacement value, feasibility, insurance
Discounted Cash Flow Long-term investment properties Strategic investment and acquisition

Conclusion

Each estimation model is tailored to different property types and financial goals. Understanding their application ensures accurate and reliable estimates. Often, a hybrid approach using two or more models provides a more balanced and informed estimation.