An accurate real estate valuation has an important bearing on financing, investment analysis, property insurance, sales listing, and taxation. However, determining the asking price of real property concerns consumers most.
Property valuation estimates long-term value in terms of owning real estate. This value materializes over time, as opposed to consumer goods that devalue from the beginning. It depends on demand, supply, usefulness, scarcity, and the type of ownership.
There are two main real estate valuation techniques, namely the comparable and income methods. These are inexact sciences. They try to strike the best balance between social / economic trends, government regulations and controls, and environmental considerations.
Real Estate Valuation By Comparison Method
The sales comparison method is a common approach for determining the value of single family homes, and undeveloped land. It estimates the value of these passive investments by comparing them with three-to-four similar properties that recently changed hands
# The ‘comparables’ must be as similar as possible to the subject property
# They must have sold within the previous year in a competitive, open market
# Their sales must have been under normal market conditions, thus not foreclosures
The sales comparison method ‘normalises’ these comparable selling prices for factors including condition, age, sale terms, location, and physical features. The value of the subject property then falls somewhere within the three-to-four results.
The Income Capitalization Approach
A property valuator will almost invariably use the income capitalization approach when deriving the value of an income-generating property. This includes apartment complexes, hotels, office buildings and shopping centers. The general procedure is as follows:
# Estimate the potential gross income after allowing for vacancies and unpaid rents
# Deduct annual operating expenses such as maintenance and government taxes
# Determine the investment a willing investor would make to realize a similar income
The value of that investment is an indicator of the value of the property, as an active investment.
Choosing the Best People to Do a Real Estate Valuation
Neither of these methods are exact sciences, because of the human factor. For example, a dishonest person could determine a lower value to sell a property faster. They could do so by choosing inappropriate comparables, or inflating vacancy rates / operating costs.
It may be wise to ask an investment specialist to help with a real estate valuation instead. That way, you have a good chance of obtaining a realistic value leading to a fair deal.