What Are The Five Methods Of Property Valuation?

What is Comparative Method?

It’s sometimes referred to as the Comparable method, or the Inferred Analysis of property value.

Comparative method of property valuation functions by estimating a property’s value based on the value of neighbouring properties. That is, through the examination and comparison of prices of properties in the same location and with a similar building specification, a market value estimate of the subject property can be had. This method of valuation is quite common and is mostly applied when trying to calculate the value of a residential property.

For this method to be used to attain an accurate valuation, the valuator must gather relevant data from neighbouring properties that possess the same attributes as the subject property. The relevant data needed for the comparative method to be successful can fall under any of the following categories;

Asset characteristics

This data has to do with property details like; location, size, condition of the property, availability of utilities, regulations concerning the property and its building etc.

Transaction characteristics

This category of data is focused on information along the lines of; how fast or slow it usually is to transact real estate in the subject property’s location, date of transaction, payment means, etc.

The most effective manner to use the comparative method is to visit the properties in person and inspect them. But because visiting each individual property in person can consume a lot of time, energy, and resources, transaction databases can be used to get necessary information concerning the properties in question.

The comparative method of valuation relies heavily on the data from transaction databases or from information derived from a personal inspection to properly compare properties and determine an accurate estimate of the subject property’s value. It is usually better when the actual sales price and not just the asking price of the comparison properties is available while applying the comparative method.

The comparative method tends to provide more accurate results when;

  1. The compared properties are similar in structure.
  2. The compared properties are within close proximity of each other.
  3. All the compared properties have same legal interest. That is, they are all either freehold or leasehold.
  4. The real estate market is stable as at the time of gathering the data. Especially concerning the prices of properties.
  5. The assessed past transactions on the compared properties are recent and relevant

What is Investment Method?

This method of property valuation is most commonly used to valuate a commercial property that has been established to be capable of yielding future cash flows either through being leased out or other means. There are recorded instances where this valuation method has been used to valuate certain residential properties as well.

An investment valuation’s results are attained by using a property’s yield of future cash flow. The lower the yield, the lower the return on investment, but the higher the yield, the higher the return on investment. If a property’s present estimated rental value (ERV), the market-determined equivalent yield, as well as the property’s passing income are made available, this will facilitate establishing the property’s value.

At the root of it, the Investment method is very akin to the Comparative method because the main variables used in both methods are determined by the market.

What is Residual Method?

This method of valuation makes use of a mostly simple calculation to help a valuator determine the actual value of a land or property purchase. It is mostly used when a property developer or an aspiring one is trying to determine if a property is good for development purposes, redevelopment purposes, or if it will be better of used for a bare land purpose.

Once the valuator has effectively made use of the Residual method, a realistic estimate of the true value of a land or property will be available. This property valuation will be useful in helping a property developer decide how best to utilize the property in question. It’ll also help the property developer decide expenditure limits to be assigned to developing the property to gain the most profit. That is, using the residual method, a property owner will be able to decide how little or how much to spend developing a property in order to make the most profit from it.

Gross development value, property developers’ profit, and building costs and fees all play a vital role in calculating property value with the Residual method.

What is Profit method?

This method is the preferable option when trying to valuate a business premises, such as a restaurant, mall, or hotel. It is calculated by taking into consideration a three year average of the business’ operating income. This figures will be derived from the business’ loss and profit or income statement.

It is best to keep in mind that the variables used in a Profit method are got from the property itself and not from the outside market. Because of this, if proper adjustments are not made during valuation, the estimates delivered by the valuator will be investment value instead of market value of the property.

What is Cost method?

This method effectively functions by taking into consideration an estimate of the replacement value of a property. It accomplishes this by analysing the cost of each component of a property. That is, property value is calculated by taking the free market value of the land and adding it to the reconstruction cost of the property’s building. The figure representation of the depreciation that building has gone through since its existence will then be subtracted from the previous addition.

But most valuators do not consider this method reliable and accurate enough in determining the current market value of a property.

Related Questions

Published on 30th May 2017

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