The process of estimating the value of the property is known as valuation. There are numerous methods for assessing the value of a property. Valuation gives useful insight to both buyers and sellers on how to estimate the approximate worth of a house. While sellers can conclude where to set the price for their property, buyers can evaluate if their investment is worthy.
There are many methods for property valuation and one can use a combination of these methods.
Comparable sales method
Here the value of a house is determined by examining the prices of other similar houses in the neighborhood. This method is most commonly used in the case of residential properties. The buyer collects relevant data for comparable properties. Assets with similar characteristics like size, location, conditions, building regulations, neighborhood, and utility are identified. Transaction characteristics like transaction date, means of payment and processing speed are considered.
The average rate per unit area at which similar properties in the neighborhood were actually sold is first found. It is then multiplied by the actual area of the current property. Any specific defects in the property or advantages are also taken into account. Though this is a straight-forward comparison, it might be difficult to find recently-sold similar properties in the neighborhood.
The cost approach method estimates the replacement value of the property. This is arrived at by taking into account the costs of its components. The final value is arrived at by adding the market value of the vacant land and reconstruction cost of the building. Depreciation suffered over a period of time is then subtracted from it.
Reproduction cost refers to the cost at a given point in time of reproducing a replica property. It is the cost of reproducing improvements of equal utility. This method, however, ignores the much finer ingredients like location and neighborhood. Further, the current market and value are not reflected.
Discounted value of rentals
This method aims at figuring out the future rental appreciation of the property. It is estimated by finding out the growth in demand for real estate and the availability of properties. This demand-supply estimate gives a fair idea of the value of the property.
Automated valuations are instant and cost-effective, and are generated, computer models. Automated valuation models use historical data that is indexed to predict current house prices. However, these do not incorporate any real comparison to other properties in the neighborhood.
Also called the fundamental or intrinsic method, the income approach focuses on the value of the property rather than comparatives. Here, the present worth of property is estimated on the grounds of projected future net income like the rent and resale value. The beauty of this method is its ability to measure a property’s value based on the property’s ability to generate and maintain revenue.