As you’re in the market looking to buy a property, you may find it hard to accurately value a property and be looking for some ways to accurately give the building a price.
Out of the five methods of valuation, it could also be overwhelming trying to determine which one of the methods is the best fit for your needs. So, in this article, we have looked at the five methods of valuing a property.
Once you have read them all and considered what type of professional you are, it should be clear what method is best suited for your needs to gain an accurate assessment.
From the comparable method to the contractors method, each approach has its own unique set of benefits and drawbacks.
So, by the end of this article, you’ll have a better understanding of how to determine the value of a property and make an informed decision when buying a house.
The five methods of property valuation explained
Below, the five exact methods for valuing a property are listed. Each one has their own advantages and they cannot all be used in the same situation. So, consider the property you are trying to find a value for and then pick a method.
It could be the case you can use multiple methods and then find an average for all of them. Doing this will give you an accurate value for the property rather than just using one.
1: The method of comparison
The comparable method, which uses information from recent transactions in the area to determine a property’s value, is the most widely used method of property valuation.
When there is a stable market and sufficient market evidence, this method can be reliable. However, without other examples to compare the property sale to, this method is essentially useless.
For example, if there are new builds being built in an area and there are no other new builds that have been sold, it will be hard to determine what to price the new build property for.
2: The method of calculating profit
The “profits method” is commonly used to value businesses, such as restaurants, renewable energy installations, or pubs and can also be applied to property.
It involves analysing the business’s gross operating income, subtracting working expenses to determine the net cash flow, and then converting the net cash flow to present value using a risk yield specific to the business.
Although it may sound complex, it is a straightforward process when it comes to property. Simply add up the rent as the property’s gross operating income and then calculate all of the property’s expenses in the same way.
3: Investment method of valuation
The income capitalisation method is commonly used to value assets that generate income, such as a long-term rental property. This method is different to the method of calculating profit because it solely uses rent.
The valuer first evaluates the current rent, and then predicts future rent levels until the end of the lease. The total rent for the term is then calculated and converted to present value using a multiple that takes into account the risk to the landlord of not receiving the rent for the entire term.
These multiples vary and you can find out more about them here.
4: The residual method
The residual method is often used to value land with development potential, for example, an area of land that hasn’t been built yet but there is maybe planning approval for the land and a concrete and finalised plan for construction.
To determine the value of land with planning consent for a dwelling. The starting point is valuing the final product (the gross development value), being the dwelling if sold on the open market.
From this value, the costs of development are deducted, including developers’ profit. The value left is referred to as the residual value, which should provide an indication of the value of the building plot.
5: The contractor’s method of valuation
The contractor’s method is implemented when the market shows there is no demand for the property such as government buildings.
This lack of market data means people will have to predict the value rather than base it on any concrete evidence or data.
They will use the previous use of the building alongside if the building has any significant valuable features such as having expensive equipment for example.
Who uses the five methods of property valuation?
Property valuation methods can be used by anyone but are usually used by professionals who need a figure to use in their business. For example, an estate agent might need a method of valuation to give to a buyer.
On the other hand, a surveyor may need a method of valuation to give to a buyer who is buying a property at auction and needs an expert opinion when they visit a property.
Surveyors will often be used as a professional by landlords and estate agents to come up with an accurate assessment of a property’s value. Hiring a chartered surveyor from the RICS is a way of finding the most qualified surveyors.
However, it is not necessary to hire someone who is chartered and in the end, using the five methods won’t be quite so hard.
For instance, if there was a property that wasn’t completely owned yet and wasn’t unencumbered, a surveyor could be called to the property to remortgage it.
Landlords will come up with their own method of valuation based on their ability to make a profit on a property. This means they are likely to be more risk averse with their valuation and undervalue rather than overvalue.
Landlords looking to make money on their purchase will likely be looking for the most amount of profit rather than buying a dream home which is what someone would be doing who is looking to buy residentially.
What is the best method of property valuation?
The best method is up for interpretation because how effective a method is dependent on the landlord and the current situation of the person who plans on valuing the property.
However, there are certainly more accurate methods that should be used in professional environments when a figure needs to truly reflect the value of a property and better yet, multiple methods should be used in combination with each other.
How do the RICS conduct a valuation?
An RICS valuation is typically more expensive because they are conducted by professionals who are qualified with the aim to enforce only the highest standards when it comes to property valuation.
When a member of the Royal Institute of British Surveyors (RICS) conducts a survey, they conduct a personal inspection of the property and use established guidelines and thorough market research to ensure the proposed value of the premises is accurate.
Visit the property
First, they will begin by visiting the property after they have been invited by the owner. During this visit, they will bring all the equipment they need and there may be multiple surveyors on site if the building is particularly large.
For more on how this works, read our article on residential property valuation where the process of hiring a surveyor is talked about in further detail.
Assess the structure
Next, the structure of the building will be assessed as part of the valuation process. They will look at the inside and outside of the building for defects and things that could present problems in the near future.
Common things to look for include if there are any pests that could have ruined the structure of any wooden beams or if there is any subsidence in the ground which could be cracking or pushing against walls.
Conduct a report
To wrap things up, the chartered surveyor will write up a report Based on the findings. not only will they include all the things that need improvement that take away from the value of the property.
But they will also include everything good that is considered structurally sound. example of what a report might include click here.
As you being valuing a property, deciding on the right method to use may become overwhelming just make sure you negotiate correctly after you have found the right deal so you don’t get gazundered or gazumped in the buying process