Real estate valuation: when do we need it, what are the methods and how to choose them?


Property valuation methods are used to estimate the value of real estate for a variety of purposes, including legal litigation and tax valuation. Properties are valued for many different reasons, and it’s a real art to appraise a property ideally.

When do we need a real estate appraisal?

Property valuation is used in the following ways:

-Determine the fair market value during an offer to purchase in the event of a divorce.

-To assess inheritance tax, capital gains or inheritance tax on the death of an individual (or to ensure that the property is not transferred at a price lower than its actual selling price) .

-Evaluation of fairness and accuracy for dispute resolution purposes by lawyers

-Evaluate the value of commercial real estate for tax purposes

-Evaluation of real estate in order to determine an amount and a type of mortgage.

-To set the price of insurance at the home of an individual or in his professional premises (to guard against liability).

-To calculate the value for the purchase of a property.

What are the methods?

Cost approach

The cost approach calculates the value of a property by estimating what it would have cost to construct comparable buildings in its place. It is often used to determine the value of a property when no selling prices for comparable properties are available or if there is significant physical damage. To be more detailed, this means that the cost is calculated as what it will cost to rebuild the building if it is completely destroyed.

Market approach

This method is used to determine the value of a property based on the selling price of comparable properties in its vicinity. It is often used for properties in neighborhoods where there are similar estates that have been sold.

Income approach

This approach is based on the estimated future income of a property and can be used for industrial, commercial or residential properties. This type of valuation should not be relied solely on as they are often based on subjective assumptions which may vary from one company to another. This can be an additional method which is used in conjunction with other approaches.

Sales comparison approach

This approach takes into account the sales of comparable properties currently on the market and those recently sold to determine a sale price for the property being appraised. This method is also unreliable as it does not take into consideration all factors such as location, period and condition of the property.

Value per door

This is a relatively new approach and it relies on market research rather than the valuation process to determine value. The appraiser will calculate how much revenue per door would be generated by each appraised property in order to compare different properties, taking into account location, time period, and other factors that may make the value different.

Price multiplier per gross rent

This method is used to estimate the value of income generating properties. The appraiser will determine the rental price of a property and then calculate its value based on that amount. For example, if a property rents for $ 1,000 per month (or $ 12,000 in a year) and has an expected vacancy rate of 20%, that means you can reasonably expect to collect $ 8,000 per year. Multiply that by the “Gross Rent Multiplier” – a factor based on location and other factors, which is typically set at around 20% vacancy rate x $ 12,000 ($ 120,000 / year) = 2,400 $ value for this property. Multiplying annual income by a gross rent multiplier is ideal for estimating the value of income-generating properties.

How do specialists choose the method?

Choosing the perfect method is not easy, but reviewers must weigh the strengths and weaknesses of each method. For example, the cost approach is simple; it is based on the cost of building comparable properties in a given area, which is an accurate way to estimate the value of new construction. However, this approach does not work as well with older or historic buildings, as their value is not so obvious.

The market approach is more expensive, but generally provides a good estimate of the value of an old or historic property. It takes into account how much buyers are willing to pay for similar buildings in that area and what tenants will be willing to pay as well. This approach can also be distorted by other factors such as improvements made by the owner.

Being a good real estate expert means being able to decipher the right approach by examining all the factors. The income approach is a bit more complicated than it looks and takes into account how much tenants would pay for comparable properties in that area compared to what they are currently paying. This can be tricky because there are different ways to do an income analysis for each property.

Conclusion

“Valuing a property is not an easy thing, and when someone is considering buying a building, it is best to consult an expert to make their decision, as it may not be enough to verify a property. similar somewhere. Sometimes you have to combine several methods, ”explains Paul McLaughling, Managing Director of Licensed Surveyors in London. Property valuation methods are very important in determining the value of a property and the types of offers to be made. It is essential that you know which approach works best for the type of building you are trying to assess, as each has its own set of advantages and disadvantages.


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