Financing a real estate, sales listing, investment analysis, property insurance and taxation of a real estate, all these require the valuation of the real estate from a financial consultant. Good financial decisions can be made only after sellers, home buyers, lenders, and real estate investors know the correct value of a property.
This article will throw light on the concept of valuation and methods that are incorporated to value a property.
The Basic Concept of Valuation of Real Estate
The value of a real estate is the present worth of the future benefits that would arise by owning a property. The benefits of real estate require a long period of time to realize. Normally, the estimate of a property’s value depends on various factors like the economic and social trends, as well as governmental controls, regulations and environmental conditions that influence the four elements of value:
- Demand: demand occurs when there is a desire for the ownership for a property which is backed by the financial means to satisfy the desire.
- Utility: Utility is the ability of the property to satisfy the buyer’s future desires
- Scarcity: Scarcity happens when the competing properties are finite in number
- Transferability: This is referred to the ease with which the ownership rights can be transferred from the present owner to the future owner.
After the reports (valuation reports and the appraisal reports) are submitted, the market value of the real estate is set. This is the price at which property actually sells.
Just like any other property, the valuation of real estate must also be done by the methodical collection of data. This is necessary for an accurate valuation. Valuation of real estate includes various factors which justify its accuracy.
These include:
- details regarding the particular property
- general data about the nation, region, city and neighbourhood where the property is located
The various methods for the valuation of real estate property are :
1. Comparable sales approach
- This is commonly used in valuing single-family homes and land.
- Also known as market data approach.
- The estimated value is derived by comparing a property with recently sold properties that have similar characteristics referred to as comparables
-
Property
can qualify as a comparable if it fulfils the following criteria:
- If it is similar to the subject property.
- If the property has been sold in the last year in an open market.
- The property must have been sold in typical market conditions.
2. Cost approach method
- This is commonly used to estimate the value of those properties that have been improved over a building in the past.
- The value of the building(s) and the land are estimated separately in this process. All the depreciations are taken into consideration.
- The estimates are then added together to get the value of the improved property.
- This approach aims at providing the buyer with a value that is not more than the value he/she has to pay for a comparable building.
- Buildings like schools, churches, and hospitals are included in the list of the building whose value is generated using this method.
3. Income capitalization
- Also known as the income approach.
- This method solely depends on the relationship between the ROI an investor requires and the net income that the property produces.
- Buildings that produce income such as apartments, office buildings and shopping centres are evaluated using this approach.
Rakesh Narula & Co. is a renowned name in the field of providing techno-commercial services. We also help in the valuation of real estate. We also help in valuation of immovable property, bank lending, insolvency and financial reporting.
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