A Discussion on the Various Methods of Property Valuation

A Discussion on the Various Methods of Property Valuation

The term “property valuation” refers to the method used to arrive at a reliable estimate of a property’s worth. This information can prove helpful to anyone considering the purchase, sale, or investment of real estate. Whether you’re looking to invest in an apartment complex, a manufacturing facility, a shopping mall, or a building for your own company, this is a crucial thing to keep in mind.

Investors can only make informed decisions about an investment property’s purchase price, monthly mortgage payments, monthly rent, and annual operating costs (including repairs, taxes, insurance, and maintenance) if they know its value.

Property Valuation Methods

Like a cash generator, an investment property can generate income over time. That machine’s worth depends on a variety of things. This is why real estate investors use many valuation techniques. Each approach can be helpful, depending on the specifics of the situation. Keeping this in mind, let’s examine five approaches to appraising property for investment purposes.

1. Comparison

There must be several recent letting/sales of properties that the valuer may compare to, ideally within a stable market, to use the comparison method, which is the most popular approach. The subject property must be similar to those recently let/sold in the region. 

With the help of an expertly compiled report that thoroughly examines the most relevant comparable criteria, their difference can be factored into an estimate of the market price.

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2. Profits

If no recent rental or sale transaction can be found for comparison, the profits approach can be implemented. This method is used frequently for commercial properties like bars, hotels, and hospitals where there is little to no chance of finding comparable variables in the data. 

Taking an estimate of the company’s gross profits and subtracting the cost of any job performed minus any rent paid. This math results in the divisible balance, the sum of money the landlord and tenant will divide up.

3. Residual

This technique determines the market worth of undeveloped land or land that will be developed soon. Due to the many inputs and expenses that are difficult to calculate and tend to alter over time, this approach has a high potential for error.

The worth of the land is determined by deducting the cost of development, which will include the developer’s profit, from the gross development value. The undeveloped value of the property represents the maximum amount of money the developer can spend on the land and can know the development valuation for capital gains.

4. Investment

A property’s worth is calculated using the investment technique, which considers the rental revenue expected to produce in the future. This strategy is often employed for the property’s primary uses, wherein the renter reimburses the landlord for the capital expenditures incurred during the tenancy (purchasing the building).

This method can calculate the income from comparable property transactions by analyzing sales and leasing data. Profit is added to expected rental income in the future, and the resulting discounted amount is the net present value (NPV). This figure would indicate the current value of the structure for house valuation for tax purposes.

5. Contractor’s

The cost method may be employed if the comparison, profitability, or investment technique is inappropriate due to the property or circumstances. This technique considers all the costs associated with supplying a modern counterpart and then adjusts the result for market transactions involving similar properties to account for the property’s age. This is the “technique of last resort” because it is rarely successful.

Diana McClain

Diana McClain