Real estate price refers to the financial amount or cost at which a property is traded between a buyer and a seller. The price of a property can be determined by a number of factors but it is usually mutually agreed upon between the buyer and seller through negotiation.
Is there a difference between a property’s price and its value?
A property can be bought or sold at a price that far exceeds or is far below its actual market value. This is because there’s usually an apparent difference between a property’s actual worth and the price at which it is traded.
The price paid to purchase a property might not in any way be a fair representation of the property’s market value. This can be due to a number of special factors such as the existence of a unique relationship between seller and buyer that gives one party a higher bargaining power. Disparity between market value and actual price can also be caused by desperation or haste on the part of either the buyer or seller, or the influence of market forces such as a sudden collapse in the real estate market. But the most common cause of such disparity is usually misinformation brought on by a faulty real estate appraisal or property valuation.
It is the duty of a real estate appraiser to calculate and deliver an estimate of a property’s true market value, not its market price. Doing otherwise can lead to an unfair trade in which either the buyer or seller might lose out.
What is a real estate appraisal?
Real estate appraisal, also known as Property Valuation in the UK, is the process of evaluating a real estate property for the purpose of determining that property’s market value or financial worth.
Conducting a real estate appraisal is necessary in order to facilitate certain real estate transactions. This is because the value of real property is dynamic and each property has its own unique characteristics (such as condition, size and location). Property valuation or appraisal reports are documents that summarise details concerning the value of a property, and this document is especially useful in determining mortgage loans or any other transaction that requires information concerning a property’s worth.
The Royal Institution of Chartered Surveyors (RICS) monitors the appraisal of properties in the UK. It is a professional body that includes all professions that have to do with property and building.
Types of Property Value
Determining a property’s value is a common way of determining the best price tag to attach to a piece of real estate. Especially if that property value is determined via a formal appraisal. Types of value commonly taken into consideration include;
- Use Value: This is the Net Present Value or NPV of cash flow that a property creates for its owner within a specific time period. Said property can generate such cash flow either by being leased or used for other commercial purposes. The Use Value concerns or is beneficial to only the property owner or current user of the property and it may exceed or be lower than the property’s actual market value.
- Market Value: This is the estimated price at which an estate would trade in a competitive market. It is the estimated sum at which a property asset would exchange when a willing buyer and the owner of an estate agree to trade. Market value is usually determined by market forces as well as the condition of the property in question.
- Insurable value: This particular value doesn’t include or take into consideration the value of the site. It is the established value of a property covered by its insurance policy. That is, the worth is only equivalent to what its insurance policy covers.
- Investment Value: Refers to what a property is worth to a specific investor. It is the perceived value of a property to its current owner or a prospective one who seeks to invest in the land. Said worth may or may not surpass the current market value of the property in question.
- Liquidation value: This is the worth of an estate after it has gone through the process of either a forced liquidation or an orderly one. Knowing this value is mostly useful during bankruptcy proceedings.
What are the uses of a real estate appraisal?
Getting a property appraisal is vital in the event of any of the following instances;
- When calculating taxes, be it personal tax or capital gains tax.
- A property appraisal report is a necessary document a financial institution will request for before agreeing to offer a mortgage loan.
- Real estate appraisal by an independent valuator is essential if seeking property refinancing from a financial institution.
- The information from a real estate appraisal report will help facilitate determining divorce settlements or estate settlements.
- Knowing the true value of a property will help determine the right amount for a property’s insurance coverage.
- Real estate appraisals are most commonly used in order to give a buyer or seller of real estate enough information to help negotiate an ideal purchase or sale price for a property.
What are the real estate appraisal methods used in the UK?
Property valuers in the UK often use one of five methods to accurately determine an estimate of a property’s current market value. The valuation method used is often dependent on if the property is commercial or residential;
- Comparative method: This method appraises a property’s value by comparing it to neighbouring and similar properties. This method is best for valuating residential properties and provides more accurate results if the compared properties share similar characteristics.
- Investment method: It is used to determine a property’s value by considering the property’s future cash flow potential.
- Residual method: This method is most commonly used if the property in question is undergoing development. It will provide an accurate value estimate to a property developer.
- Profit method: A very effective method if calculating the value of trading properties such as bars, restaurants, hotels, and similar structures.
- Cost method: It is used to appraise the value of land or buildings that possess unique characteristics and that data is unavailable to determine their worth. Properties appraised this way are usually hard to sell because of their characteristics or function.