Different Methods & Types of Property Valuation & How to Value a Property?

Estimating the value of a property is crucial for a range of endeavours, such as insurance, investment evaluation, and more. Among them, the most useful application of property valuation is for determining the purchase price of a property, particularly as it pertains to sales.

The next segment will provide an in-depth overview of property valuation, factors that affect it and different methods of calculating it.

Property valuation is a process to calculate the actual price of a property, like a land plot or a structure. It includes brand, property-related rights, copyright, reputation and marketing and promotion.

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A valuer or surveyor with a professional degree from the Institution of Valuers can carry out the valuation of a property in India. They must get a licence from the State body before starting the same.

Commonly, valuers perform following the lender or seller who funds the purchase. They produce property valuation as a report, with proper plans and photographs, citing facts as follows:

• Location
• Number of rooms
• Measurements and site boundaries
• Condition of the property
• Structural defects
• Landscaping
• Associated risks and benefits, etc.

Furthermore, valuers are also appointed to evaluate property value with development potential and set up council tax and rating levels.

Valuers consider economic and social trends, environmental variables and Government-laid regulations while calculating the value of a property. A few of the various factors affecting the valuation of a property are as follows:

1. Location

Individuals may have come across brokers quoting a higher price for a building located in commercial and well-developed areas than their counterparts in residential areas. Similarly, properties on freehold land exhibit higher valuations than leasehold plots.

2. Amenities

Apart from electricity connection, network coverage, water facilities, and sewerage, individuals nowadays look for properties with parking lots, children's parks, swimming pools, gymnasiums, community halls and other amenities. Therefore, property valuation depends on the availability of necessary amenities as well as comfort.

3. Structure

The price of a project depends on attributes, including the quality of material used in construction, size, labour expenses, durability and others. Moreover, physical factors, such as layout, design, roof coverings, foundation type and height of a building, significantly impact the rate.

4. Infrastructure

Investors consider infrastructural development while looking forward to purchasing a property. A rise in property valuation is well-connected with roads, flyovers, rail stations, airports, bus terminus, educational institutions, hospitals, entertainment hubs, retail markets and other day-to-day facilities within its vicinity.

5. Demand and Supply

The demand for a property is inversely proportional to its supply. That means that as the availability of properties decreases, their values increase. In addition, any change in the population of a particular region influences the demand. A particular region with an increase in population will substantially drive prospective investors over a comparatively scarcely populated area.

6. Affordability

Affordability establishes a connection between property valuation, interest rates and wages. If any of these variables maximise in a certain area, the inhabitants start looking for a better lifestyle elsewhere.

Based on these factors and the country, region, city and locality, the valuers use different property valuation methods to arrive at the real rate.

Once an investor decides to get a property, the valuers apply any of the following methods to determine the actual rate of the same. They are as follows:

1. Sales Comparison Method

Also known as the market data approach, this method helps valuers analyse the current market rate of properties of a particular region to create a valuation report. It also compares similar properties that have been sold recently. Moreover, the sales comparison method widely applies when appraising single-family houses and lands. Further, comparable properties have certain common traits with the subject property, like being sold on a competitive open market the previous year, similarities with the subject property and sale under conventional market conditions.

2. Profit Method

This process deals with the profit from a property and capitalising the same at a proper rate of return based on several external factors. The profit method applies to public places like hotels, theatres, marriage halls and more. In this regard, a valuer determines the capital valuation of a property as per gross revenue and working expenses.

3. Cost Method

Valuers use this method to estimate a property replacement value, value of vacant land and buildings loss in value from depreciation. In simple terms, they analyse the average cost of purchasing and building a similar property in the same location and then draw a comparison to calculate property valuation. It widely applies when the market is scarce and thus adds different values to development and property.

4. Residual Method

This method applies to properties which have development potential. Valuers deduct development cost (including the developer's profit) from gross development. The residual sum is the capital the developer spends on a property when in undeveloped form. However, this method is inaccurate as it tends to change over time, and the inputs and costs are difficult to evaluate.

5. Contractors Method

This property valuation process is applicable in the absence of rental evidence. That means a valuer calculates the value of a property based on the theory that a tenant may build an appropriate alternative property under two conditions:

• The landlord demanded a huge amount of rent.
• There is no property to rent.

6. Investment Method

This method evaluates the market value of a leasehold interest in property based on its potential to generate future income. It applies to the main forms of properties where a tenant provides the landlord with an investment return on the cost involved in purchasing the property. The valuers analyse the comparable property transactions of sales and lettings to calculate the revenue. Next, the profit is applied to the upcoming rental income and indicates the present worth of the property.

Though skilled valuers perform these calculations, anyone involved in real estate transactions will benefit from knowing about the various property valuation methods.

The property valuation is crucial for the followings:

For Buyers

The valuation of a property refrains an investor from overpaying or selling it at a lower rate than its actual price.

For Insurance Policy

Insurance companies consider the value of a property to provide monetary coverage in case of an unforeseen incident. Further, the valuation confirms affordable coverage costs and mitigates the risk of insufficient insurance policy coverage.

For Rent

Property valuation helps determine the market price based on which a buyer can estimate the monthly rent. Moreover, the value informs about the area's current rental rate and scrutinises the feasibility as per the rental possibilities.

For Taxation

A valuation report aids in evaluating property tax, income tax, wealth tax, etc. It also offers an accurate rate and helps in reducing the tax burden.

For Renovation

Renovating a property or building increases its value. However, individuals should seek a professional property valuer for the actual property value to decide whether to invest in renovation.

For Home Loan Application

Reputed financial institutions ask for property valuation to evaluate the interest rate on a home loan. Further, it also determines various mortgage terms and conditions.

For Property Litigations

Property disputes are quite common in India. In this regard, property valuation helps one do a fair distribution among the heirs.

Additionally, property valuation protects the investors from misconduct and overpriced schemes. As it determines the accurate market value, it assists and directs one in better property decision-making.

The followings should opt for property valuation services:

Buyer

Property valuation helps a buyer understand whether investing in a property is worth the financial commitment.

Seller

A seller should seek help from an expert to prepare an accurate property valuation report. This will help one know its exact worth, lowering the chances of underselling it.

Taxpayers

A valuation report provides accurate figures, thus helping one from financial burden.

Investors

Investors can use online property valuation services to confirm a property’s actual worth. Further, it will also help track current prices and trends.

Business

Property valuation is crucial to finding the right location for individuals planning to expand their businesses.

Apart from these, property valuation will serve as a certificate to validate the actual worth of a property admissible in a court of law.