Property valuation methods
Text from 2019. Laws, rates and prices may have changed since then. Ask an agent
One of the steps in a real estate transaction is valuation. Only a property valuer can carry it out. A valuation will be of interest to people who need a mortgage or a renovation loan. Business owners also often decide to have one done. Learn the property valuation methods and make informed choices.
Property valuation methods – introduction
Valuation is a process that aims to determine the market, replacement and cadastral value of a flat, house or commercial premises. One of the following approaches can be used for this purpose:
- Income
- Comparative
- Cost
- Mixed
Mini glossary
Market value is the price of a flat that can be obtained on the property market, that is, when it is put up for sale. This value is determined on the basis of the cost per square metre of space in a given location on the day the agreement is concluded. Choosing this option can be risky, because market value often changes.
Replacement value concerns the cost of restoring a residential or commercial unit to the condition it was in before the damage occurred. It consists of the valuation of all renovations and the restoration of the building to its pre-damage state.
Cadastral value is determined on the basis of values representative of a specific type of flat or house within the area of a given city or municipality. It is set using the transaction prices of the previously mentioned properties.
Property valuation methods – description
The income approach requires knowledge of the income that a specific property can generate from payments such as rent. Here we must also distinguish several types of approach: the investment method, the profit method and the simple capitalisation technique.
The comparative method is the approach used most often. The value of a flat or house is determined on the assumption that a given value corresponds to the prices of properties similar to the one being valued. Prices are adjusted for differences between the units. Changes caused by the passage of time are also taken into account. The property being valued is compared using the paired comparison method, the average price adjustment method or statistical market analysis.
READ ALSO – WHAT IS A PROPERTY VALUATION REPORT
Cost method
applies only to determining the replacement value of a property. Here we distinguish the detailed technique, the aggregated elements technique and the indicator technique. The last method, the mixed one, is linked to market value. It is a combination of the income and comparative approaches. Units showing features similar to the property being valued are taken into account, together with the income they generate. Within this method one can identify the residual technique, the liquidation cost technique and the technique of estimated land indicators.
