Property Valuations

 

Property Valuations

When it comes to buying, selling, or even refinancing a property, property valuation is a crucial step in the process. Understanding what property valuation is and how it works can help you make informed decisions, negotiate better deals, and avoid costly mistakes. In this comprehensive guide, we'll cover everything you need to know about property valuation, including:

1. What is Property Valuation?

2. Why is Property Valuation Important?

3. How is Property Valuation Done?

4. Factors That Affect Property Valuation

5. Different Methods of Property Valuation

6. How to Get a Property Valuation

7. Conclusion

1. What is Property Valuation?

Property valuation is the process of determining the market value of a property. It involves analyzing various factors such as location, size, age, condition, and other relevant features that affect the property's value. The result of property valuation is a fair and accurate estimate of the property's worth in the current market.

2. Why is Property Valuation Important?

Property valuation is important for several reasons. First, it helps buyers and sellers determine the fair market value of a property, which is essential for negotiating a fair deal. Second, property valuation is necessary for mortgage lenders to determine the loan amount that can be offered to a borrower. Third, property valuation can help property owners determine the right price for renting out their property. Finally, property valuation is essential for tax purposes, as it determines the property's taxable value.

3. How is Property Valuation Done?

Property valuation is typically done by a certified appraiser who uses several methods to determine the property's value. The appraiser will inspect the property, take measurements, and gather information about the property's features, location, and condition. The appraiser will then analyze the data and use one or more of the methods discussed in the next section to arrive at an accurate estimate of the property's value.

4. Factors That Affect Property Valuation

Several factors can affect a property's value, including:

- Location: The property's location is a crucial factor that affects its value. Properties located in desirable neighborhoods with good schools, access to amenities, and low crime rates typically have higher values than those located in less desirable areas.

- Size and Features: The size and features of the property, such as the number of bedrooms, bathrooms, and other amenities, can also affect its value.

- Condition: The property's condition, including its age, maintenance, and any necessary repairs, can impact its value. A well-maintained property typically has a higher value than one that requires significant repairs.

- Market Conditions: The current state of the real estate market can also affect a property's value. In a seller's market, where demand exceeds supply, the property's value may increase. In a buyer's market, where supply exceeds demand, the property's value may decrease.

5. Different Methods of Property Valuation

There are several methods of property valuation, including:

- Sales Comparison Approach:

This method involves comparing the property to similar properties in the same area that have recently sold. The appraiser will adjust the sale prices of these properties based on any differences in features and conditions to arrive at an estimated value for the property being appraised.

- Cost Approach:

This method involves estimating what the value of a building should be roughly equivalent to the cost one might incur in building an identical structure. This real estate appraisal method embraces the idea that investors should never spend more to purchase a property than they would building the same one. 

At a high level, the cost approach to appraisal involves:

Calculating the cost of replacing the building, depreciation, and the land’s value

Subtracting depreciation from construction costs

Adding the land’s value

Because material costs weigh so heavily in the cost approach appraisal, this method is most helpful for new buildings. It’s not as useful for older buildings constructed with dated building materials. The land’s value must also be publicly available.

 value of a building should be roughly equivalent to the cost one might incur in building an identical structure. This real estate appraisal method embraces the idea that investors should never spend more to purchase a property than they would building the same one. 

At a high level, the cost approach to appraisal involves:

Calculating the cost of replacing the building, depreciation, and the land’s value

Subtracting depreciation from construction costs

Adding the land’s value

Because material costs weigh so heavily in the cost approach appraisal, this method is most helpful for new buildings. It’s not as useful for older buildings constructed with dated building materials. The land’s value must also be publicly available.

-Income approach

The income approach appraisal is based on the philosophy that a building’s value should be based on the revenue it generates. 

To calculate the building’s value with this real estate valuation method, start by subtracting the operating costs from the revenue, which yields the net operating income. Then, divide the NOI by the cap rate. 

There are two different formulas for the income approach appraisal: the direct capitalization method and the yield capitalization method. The former assumes that revenue will remain the same, while the latter acknowledges that revenue changes as tenancies change.

Because this real estate property valuation method depends entirely on revenue, it’s not the ideal choice for owner-occupied properties.

-Price per square foot

The price per square foot method of real estate appraisal considers value through the lens of total space available. Because property values can vary dramatically from market to market, it’s crucial to benchmark within the same submarket. For example, price per square foot can vary dramatically between Detroit and New York City, and potentially even different neighborhoods within New York City.

To find price per square foot, simply divide the property price by the total square footage.

The price per square foot might not offer all of the information that an investor needs to make a final decision. For this reason, it works best as a secondary valuation method, paired with another approach outlined above.

Conclusion

There is no perfect method of assessing the value of a property, each method works well. Valuation helps buyers and sellers to determine the fair market value of a property, which is essential for negotiating a fair deal of the property. Although the value of the property is affected by location, size and type of property, it is essential that you choose the right approach in relation to the type of property so that your valuation will not be biased.

Rugare Madzara

Guest and Tanner Real Estate (Pvt) LTD