Property Valuations And Methodology
Whether you are a property investor, a first-time buyer, or currently own your home, it’s always crucial to understand the value of a property. Knowing the value of a property gives you a clear idea of what you could or should put it on the market for, helps you understand what you could pay when buying your next property, how much you may need to pay in terms of stamp duty and other property taxes, and more.
When it comes to determining the value of a property, there are several different strategies that can be used. Along with this, the value of any given property can also be impacted by several different factors including the location, nearby amenities, appearance, original features, and even the potential for renovation and improvement.
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Capitalisation Method of Property Valuation
This method estimates the value of a commercial property by calculating the net present value of or net cash flow or future net profits. To determine the capitalisation of earnings, take the property’s projected net income per year and divide it by the market capitalisation rate. This method of determining the value of a property is often used by lenders, developers, property investors, and commercial real estate investors. It is generally referred to as the property valuation income approach.
Income Approach Property Valuation
The income approach is also referred to as the profit method and is usually the preferred option when obtaining a valuation of a commercial property or business premises such as a hotel, restaurant, or shop. Generally, it is calculated by looking at a three-year average of the company’s operating income, which is taken from the income statement or the profit and loss statement.
Who Uses the Income Approach to Property Valuation?
In most cases, residential and first-time home buyers do not need to be concerned about the income approach to property valuation. It is a method that is generally used to value a property that is expected to generate income for the owner such as a rental property, retail unit, office unit, or a commercial property that is being developed as a business premises. Due to the nature of the property as an income-generating asset rather than a personal home, it’s important to take into account the amount of income that the property is expected to earn for the owner when it comes to figuring out how much the property is worth.
Other Methods of Valuing Properties
Along with the income approach, there are various methods used by professionals, lenders, estate agents, and RICS surveyors when determining how much a property is worth. These include:
Cost Method
This method of valuing a property considers an estimate of the replacement value of the property. If you are buying a home and have a homebuyer’s survey or structural survey conducted on the property beforehand, you are likely to receive information in the survey to inform you of how much you would expect it to cost if the property were to be rebuilt from the ground. To accomplish this, each component of the property and how much it costs is analysed. This method is not commonly used in property valuations as most estate agents, surveyors, and other property professionals do not find it a reliable or accurate enough method to determine the property’s current market value.
Residual Method
This valuation method uses a simple calculation to determine the actual value of a property or land purchase. It is generally used by property developers who are in the process of determining if a property or piece of land would be a good investment for development or redevelopment purposes.
The residual method is a popular choice among professionals and valuators as it provides a realistic estimate of the property or land’s true value. It can be helpful for property developers who want to determine the best way to use the property or land that they are investing in and utilise methods that are likely to earn the highest profits. The residual method can help property owners or developers determine how little or how much to spend on the development of a property or piece of land to make the highest profit.
Comparative Method
This method uses an estimate of the property’s value based on the value of nearby and similar properties and is the most commonly used valuation method used by estate agents and RICS surveyors in the buying and selling of residential homes.
If you are looking to sell your property or are in the process of purchasing a new home and a valuation has been ordered by your lender, then this is likely to be the method that will be used when it comes to determining how much the property is worth.
Both estate agents and RICS surveyors will look at properties in the nearby area that are similar to the property you are buying or selling to find out how much these have sold for in recent months. Bear in mind that when this method is used, the valuation will only be valid for a limited period of time, as changes in property prices or changes to the local area could impact the value of all the properties in a given location.
What is a Property Valuation Based On?
With different methods available for finding an accurate value for a given property, and lots of factors being taken into account when it comes to figuring out how much a property might be worth, it is difficult to get a genuine value for any property, but with the right method, you can get a decent estimate. Most of the time, the value of a property is determined by the free market, which can be quite unpredictable. Because of this, valuations of a property can change a lot over time as the current market will play a huge part in determining how much a property will sell for. While you can get an estimated value of the property on your own using online tools or ask an estate agent to provide you with a figure, a proper valuation of a property can only be carried out by a chartered surveyor, who will take several different factors into account.
Location
The location of your property is a crucial factor when it comes to determining how much it is worth. Properties that are located in desirable areas, close to good amenities, or near transport links tend to be valued higher compared to those in less desirable areas or with fewer amenities. Properties that are located close to schools, transport links, parks, shops, dining opportunities, and more tend to command a higher price.
Improvements
Many homeowners take on expensive renovation and improvement projects on their homes to not only improve their living space but also in the hope that this will lead to a higher estimated value of the property.
While making improvements to a property can raise its value, it’s important to be mindful of the improvements that you make as some will raise the estimated value more than others. For example, any improvements that create more rooms in the home, such as an extension or a loft conversion that can be described as an additional bedroom can add thousands of pounds worth of value to a property. On the other hand, other costly improvements such as kitchen or bathroom renovation might be appealing to potential buyers but may not always raise the estimated value by that much.
Other Factors
Along with the main factors such as the property’s location, number of rooms, proximity to amenities and transport links, and any improvements that have been made, several other factors might impact how the property is valued. These include the age and size of the property, the size of the plot and whether or not there is a private outdoor space present, and the layout of the rooms.
Convenience also plays a part in estimating the value of a home since factors such as the amount of storage space available and what kind of parking is available at the property will also be taken into consideration when determining how much the house is worth. The presence, condition, age, and safety of the heating and electrical systems will also be taken into account, along with the overall appearance and maintenance of the property. In general, a property that is well-maintained and in good repair will be valued higher in comparison with a property that needs a lot of work doing to it.
Finally, the type of property will also play a huge part in the value. Detached properties tend to be more desirable, and therefore valued higher, compared to semi-detached and terraced properties.
There are various methods used to value a property, and the best one to use will depend on the type of property you want to buy or sell, and how it will be used in the future. There are also several aspects that are considered to help determine the most accurate estimated property value.
