Property Valuation

Property valuation or real estate appraisal can be described as the process of getting an expert opinion concerning the market value of a real estate property. Property valuations are necessary because the value of a property is bound to change with the passage of time. A property’s value can either soar or diminish depending on the state of the property and the influence of economic or market factors.

A property’s location is an essential part of what influences the result of a property valuation. Location does not refer to just the country which the property is domiciled, but its immediate environment and neighbourhood. A property that has experienced upgrades or improvements can have its value upwardly revised due to effected changes that make the property more marketable.

A property valuation report on the other hand, is a formal document that states the findings of a valuation process. The report is often useful in various scenarios such as; making decisions concerning mortgage loan applications, settling divorces and estates, calculating taxes and other instances. But more often than not, a valuation report is used to receive information that will help establish the appropriate sale price for a property.

Generally, a property valuator that is deemed qualified for the position is required to have at least the mandatory educational grade. This mandatory educational grade can vary between countries, as some jurisdictions require a valuator to be licensed to practice while others do not. In the UK, property valuators are often referred to as “valuation surveyors”.

Types of Property Value

Various sorts of property value can be presented via a property valuation report. Some of the mostly commonly requested for values include:

  • Market value of a property: Market value refers to the price at which a land asset might trade. The term is often considered to be synonymous to fair value or open market value. Simply put, market value is the estimated amount that a property can be exchanged for between a buyer and seller as at the date of the valuation.
  • Value-in-use/Use value: This refers to the NPV or net present value of cash flow that a property can generate within a certain time frame when used in a specific manner. Use value is only relevant to the owner or user of a property. The value-in-use might be higher or lower than a property’s perceived market value.
  • Investment value: This refers to what a property is worth to a specific investor. The investment value of a property is relevant only to its owner or prospective owner as they consider the property’s investment potential. This value might be equivalent to the property’s market value, or it might be higher or lower.
  • Insurable value: This is the amount of a property’s value that an insurance policy will actually cover. It rarely ever includes the value of the site.
  • Liquidation value: This value is usually sought during bankruptcy proceedings concerning a property’s owner.

Value versus Price

There is usually a distinctive difference between the price at which a property is bought/sold and the property’s actual market value (what it’s really worth). The price can either be higher or lower than the property’s actual market value and is usually dependent on the circumstances surrounding the property transaction.

Price paid for a property might not be a true reflection of a property‘s actual worth. This can be due to presence of certain considerations such as a special arrangement or unique relationship between the buyer and seller. More often than not, a difference in the price at which a property is transacted and its actual market value is born of a stronger bargaining power on the part of one of the parties to the contract. This will lead to such a party having an undue influence over the negotiation process. In such a situation, the price paid for the property will not be its market value, but rather its market price.

Buying or selling a property at more or less of its actual market value can also be caused by the buyer or seller being unaware of the property’s actual market value. It’s for this reason that the assessment of a property valuator is important prior to negotiating the purchase price of a property. Selling a property at too cheap a price, or buying one at too high a price can be detrimental to either party to such a transaction.

Approaches to Value

There are three common methods normally used to determine a property’s value. These methods are usually independent of one another. They are;

  • The sales comparison approach
  • The cost approach
  • The income approach

What is the cost approach?

Using this approach, a buyer will not pay a higher sum for a property than it will cost to build a similar property.

This approach has also been referred to as the summation approach. The theory behind this approach is that a property’s value can be calculated by adding up the land value and depreciated value of all improvements already made to the property. The worth of the improvements is referred to as the Reproduction/Replacement Cost New Less Depreciation or RCNLD. Reproduction means building an exact copy or imitation of the property. Replacement cost refers to what it will cost to develop a property or make improvements to it.

The cost approach is believed to be more reliable when applied in considering the value of a recently built structure and special use properties, but the method is known to be less reliable in valuing an older property.

What is the income approach?

This approach bears similarities to methods applied in carrying out financial valuations, bond pricing, or securities analysis. The income approach is mostly applied in valuing commercial and investment properties. That is, properties that generate income.

What is the sales comparison approach?

This approach compares a property‘s features with those of properties that have similar features and have been recently sold in comparable transactions. The approach is based mostly on the principles of substitution. That is, an individual is most likely not to pay more for a property than it will cost to buy a similar property.

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Published on 9th June 2017

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