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C. Income Approach
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People often buy
property as income-producing investments and
the property's income stream is another way
of measuring a property's fair market value.
Another way to look at it is to see what an
investor would pay for a piece of property
in order to get income over time. For
instance, suppose he or she decides to
invest in real estate and knows that he or
she could generally expect a seven percent
per year return from such an investment.
That means that on an investment of one
hundred dollars he or she could expect to
receive income of seven dollars per year. If
he or she invests one hundred thousand
dollars, he or she could expect to receive
seven thousand dollars income every year.
Suppose he or she is considering the
purchase of a piece of property that
provides seven thousand dollars a year in
rental income after all expenses. He or she
should be willing to pay one hundred
thousand dollars for that property because
that is the amount necessary to invest in
order to get an annual income of seven
thousand dollars.
The expert witnesses
have referred to this way of arriving at the
property's value as the “capitalization of
income” formula because it gives you the
amount of money or capital that should be
invested to purchase the property in order
to receive the income which the property
produces.
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As
you have heard, experts can differ as to [indicate
here as appropriate: the rate of return; the
property's potential or anticipated net
income on the date of taking, i.e., the
income that could have been expected if the
property were available for lease on the
date of Experts can even disagree as to
the importance of the capitalization
approach in arriving at a fair market value
of the property. When you consider
evidence concerning the income produced by
the property, you should only consider it as
it affects the market value of the property.
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D. Cost Approach The
market value of the property may be
influenced by the value of the structures on
it. The value of the structure(s) is a
factor that may affect market value. You
must determine the value of the land as
enhanced by the value of the structures on
it. Suppose that the highest and
best use of farm land might be to develop it
into residential building lots. In that
case, a barn would not enhance the value of
the land at all. In fact, it might even
reduce the value of the land because of the
expense necessary to tear it down so that
houses could be constructed.
Suppose, however,
that someone interested in buying property
wants to use it for a home and the property
already has a house on it. It is logical to
assume that such a house would enhance the
value of the property; certainly, the buyer
would want to know how much the house itself
is worth; that is, the reproduction cost of
the building -- how much it would cost to
build one like it, less the wear and tear,
or depreciation, the building has suffered
over time.
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