What Residential Property Valuation Methods Are Available?

What is the Comparative method?

Also known as the Comparable method, or the Inferred Analysis of property value, this method valuates a property’s estimated worth by taking into cognizance the value of other properties in proximity to the subject property. This means that by examining the prices of properties that are similar to the subject property and are within the subject property’s neighbourhood, an accurate estimate of the valuated property’s financial worth can be attained.

In order for an accurate market value to be achieved via the comparative method, the valuator must first collect relevant data concerning neighbouring properties that have same characteristics as the subject property. The relevant data required for using the comparative method successfully include;

Asset features

Data that falls under this category has to do with property features like; location, size, condition of the property, availability of utilities, regulations concerning the property and its building etc.

Transaction features

Data under this category is primarily related to information concerning the past sale(s) of the property in question. For example; how quick or slow it is to transact real estate in the subject property’s location, dates of past transactions, payment means, etc.

In order to get the best results from using the comparative method, it is best to visit each property in person to inspect and collect relevant data concerning them. But because having to go to each property will consume a lot of resources, transaction databases can be used to get the information that’s needed concerning the neighbouring properties.

Without data from transaction databases or from personally inspecting and researching the neighbouring properties, the comparative method of valuation will be unable to deliver an accurate market estimate of the subject property’s value. Also, the comparative method tends to provide more accurate results when;

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

What is the Residual method?

This method of valuation occurs by a valuator using an uncomplicated calculation to determine an undeveloped land or underdeveloped property’s actual value. It is mostly used when a property developer or an aspiring one is trying to determine if a property is ideal 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 method 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 that should be assigned to develop the property in order to gain the most value. 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.

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

  • Gross development value (GDV): GDV is an essential aspect of the residual valuation method which is why expert property developers make sure to establish it from the start. GDV makes clear what the projected or expected final capital value of a development project will be once sold.
  • Building costs and fees: Building costs include any costs accrued during site preparation and property construction. While fees on the other hand have to do with payments to professionals involved in the development process. Examples of such professionals include; architects, planning consultants, solicitors, engineers, and property agents.
  • Property developers’ profit: From the onset of the development of a property, the property developer has to keep in mind what the return on investment or profit will be upon completion of the project.

What’s the difference between a residential and commercial property?

What sets a residential property apart from a commercial property is briefly discussed below;

  • Regardless the economic situation, occupants for a residential property are usually available, unlike commercial properties that might witness a close down upon the failure of a business due to economic downturn.
  • An investment in a property with the goal of leasing it out promises an availability of steady income. This is because when a tenant vacates a residential property, there’s usually a new tenant to replace the outgoing one.
  • A residential property is built for the sole purpose of providing shelter, while a commercial property is built primarily for business purposes.
  • Commercial properties are not usually permitted to be developed in the midst of residential buildings.
  • The safety requirements for residential properties are not as lengthy as those for commercial properties, especially commercial properties involved in manufacturing.
  • The cost of rent for a residential premises is usually determined by the prevailing market rates of similar properties in similar locations.
  • Buying a residential property is possible with only a small down payment. It is also possible to get as much as 90percent mortgage financing from a financial institution. Same can’t be said for a commercial property.
  • Government regulations for residential properties usually greatly differ from those for commercial properties.
  • The lease agreement for a residential property is usually standard and easy to comprehend. Leases concerning commercial properties are usually more complicated because they cover more matters.

The lease period for residential and commercial properties tend to differ. The average residential building’s lease lasts for about 1-2 years unlike with commercial properties.

Related Questions

Published on 1st June 2017

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