There are many factors that need to be considered when it comes to property whether its residential or commercial related, if you are deciding whether to purchase or rent or sell a property.
Having an understanding of the ins and outs of the property market and where you are situated will be of great benefit to you. You may be asking yourself, how or where do i even begin? Thats where a property valuer comes into play, an independent expert specialsed in the field of all property related purposes. A valuer is appointed to best suit your purpose to establish the fair market value as well as any other factors that come into play.
This article will breakdown the five main methods used in a property valuation. These include:
- The comparison
- Profits
- Residual
- Contractors
- And investment
A valuer can use more than one of these methods when conducting a valuation to calculate the true market value and this all depends on the property type aswell, being either residential orcommercial.
Comparison Method
Most commonly used, the comparison method can bhe applied to value most property types, such as houses, shops, offices and standard sized warehouse. For a valuer to conduct a proper valuation there should be multiple,recent letting/sales of the properties that can be compared to within a stable market.
Our reports are specilaised, taking into account the best comparable factors, selected and analysed by a highly qualified professional. Adjustments are therefore able to be made for the different properties so an estimation of the market value can be established.
Profits Method
If there are no comparable rental/sales available then the profits method is applied. This type of method is used for pubs,hotels and nursing homes where a business property results will have a lack of variables to compare to. The way in which the method is used is estimating the gross profits and deducting any work expenses that are made, this will exclude rental payments. When the calculation is determined the amount which is called ‘capital’ is to be shared between tenant and landlord, which is know as the divisible balance.
Residual Method
Property that is valued for its developmental potential or vacant land thats current use will change to become more profitable. Although this method can be used at times it can be inaccurate due to a number of inputs as well as determining the costs which can be a challenge with the tenancy to change over time.
Contractor’s Method
All depending on the property and situation, can this method also known as the cost method be used if the above mentioned methods cannot. Due to the unreliability of this method, its referred to as the “last resort” method.
In other terms, if a property has a specialist nature( no market transactions occurring) the contractors method assesses all costs that may provide a modern equivalent property, its then adjusted to reflect the age of the property.
Investment Method
A method used to determine the market value for freehold/leasehold property. Due to its potential to generate future income. This method is used for the main forms of the property, put simply a tenant is providing the landlord a return on their investment from purchasing the building(the capital lost)
When using this method to find the revenue of the comparable property transactions to analyse the sales and letting of the property. To calculate the NPV (net present value) of the property by the profit which can then be applied to any future rental income. And then discounted back to the present day. This will give the valuer the indication of the building worth as it stands currently.
When you have a clear understanding of these top methods used for any property valuation is essential to help you determine what service is best suited to you. If you are a buyer, a property valuation can reduce the risk of you purchasing a property for more than its true value. For sellers, there are multiple reasons why you should require a valuation and the most commonly would be to determine the potential selling price as well as gaining an understanding of the opportunity the property has to make improvements before selling which will increase the potential to add value to the property.
Its important to know when would be best to sell due to the fluctuating market.
With many different reasons and situation when it comes to your property a valuation is highly recommended whether you decide to sell, rent or buy a property. Seeking out a property valuer that is highly trained and specialised in property will ensure you receive the best service and valuation report to help with any informal decision you may have. At the end of the day, property will be one of the biggest assest you will own so its important you have the right team in your corner
Author bio
Lesile King is NT’s top leading industry expert in all property related purposes. Lesile’s experience in the field of both residential and commercial property has seen her utilise her knowledge to led numerous courses, and guest lecture at various educational institutes around Australia. With more than 30 years’ experience we are glad to have Lesile apart of the territory valuers team here in our Darwin City office.
June 3, 2022
US Property
Indian Property
UK Property