Properties are one of the most profit-making assets. But unless you are actively involved in the real estate and construction industries, the valuation of the property will be no cakewalk. In fact, it never is, even for someone who has worked for years with the subject. If you are wondering how it is like to think like a property valuer or want a glimpse of what all they have to deal with, then you have stumbled upon the right place.
The real estate and property market is constantly on a seesaw. There is no stable and fixed way to determine values as it keeps changing due to many factors like demographic division, migration, land acquisition, bank interest rates, developmental projects, and new law amendments, and so on. So a property valuer has to be on his feet to prove his competence and be relevant.
Property Valuer and Real Estate Agent, Are They Same?
Although both their end goal is to determine the price of a property, their way of approach is quite different. A real estate agent will negotiate and crack the highest price attainable for a particular property. Nevertheless, they have to take into account the market price in the locality. They rely on current day value and give competitive pricing. A property valuer, on the other hand, will analyze your property in the current state and make calculations using various components and estimate the true value of the property. They give fair pricing. One will be preferred by a seller and the other, by an investor. You know which and who. But valuation should be important for both as it will avoid the seller from overcapitalizing it which can create problems later while refinancing.
Why is Property Valuation Important?
- Property valuer will provide a legal certificate stating the actual estimate value of your property. This certificate will minimize tax payment by a tax depreciation schedule.
- It will determine the rental income of a property.
- It will give the necessary information required for property appreciation.
- It will be essential in making future investment analysis.
- Property valuation is required when applying for a mortgage.
What Approaches Are Used for Valuation?
Since each property will have different features, the approach to valuation would be different. Currently, there are four valuations approaches used by property valuers.
- Sales Comparison Approach– In this approach, one has to compare the property value with other similar properties that were sold or rented in that period in that area. They are the ‘comps’ . The features are mostly identical. You can maximize the value by mentioning certain features that are unique to your property.The ease of transport, location, etc. You will need to calculate the benchmark price, which is an average of three or more closely priced properties.
- Capital Asset pricing Or CAP Model– It is an exhaustive approach where value is estimated based on Return on Investment (ROI). It establishes a comparative analysis between the risk and non-risk investments. Risk investment involves rental income and non-risk investments like government bonds.
- Income Approach– It estimates the income from renting the property relative to the initial investment made on the property. This approach is widely used for commercial properties or any leased property. The net annual and income and net property income are used to determine a cap rate or capitalization rate, the rate of return expected from an income-producing property, or the potential yields it promises. The interest expense on the mortgage is also taken into account.
- Cost Approach– This approach is applied for real estate projects that involve the valuation of multiple buildings to determine property prices. The price of Each building is estimated using either the square foot method (cost per square feet area on floor), or quantity survey method (cost of total raw material required and installation costs), or the unit-in-place method (cost of construction per unit of a component). Depreciation is also taken into account here.
There are a lot of metrics used which you will find in any legitimate book. The complexity lies not in the calculations but rather the judgment on where to apply what. Property valuation is an art that can only be learned through practice.