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Importance of Real Estate Valuation and the Different Methods of Valuation


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Real estate valuation is important as it allows you to determine the value of a particular interest in a property on a certain occasion for a specific purpose. Market value is described as the projected amount for a property which should be exchanged on the date of valuation between two willing parties, namely the buyer and the seller, in an arm’s length transaction after proper marketing, with proficient, cautious action and not under pressure. In this transaction, both parties do not have a special relationship with each other which might affect the determination of the property’s price.

There are many different methods to valuate one’s property. In fact, there are five. One of them would be to use the comparison method. It involves analyzing the recent transactions of similar properties, as compared to your property, which is available on the market between your property and other similar property. It is usually used when there are sufficient recent transactions going on, enabling us to indicate the value of the property.
Adjustments will also have to be made on the value due to certain factors, such as the expenditures made after the purchase, the location and the physical characteristics.

Income method is one of the other methods which use comparison to estimate the value of your property, except this time we would be comparing the rentals of similar properties. This method involves the estimation of the present worth as compared to the future, depending on any future benefits there might be. Future benefits might include amenities like shopping centres, supermarkets and new MRT stations.

Another method would be the cost method. It is based on the theory that people will not give more for an old building than it would cost to build a replacement property providing similar function and utility. It is usually used to valuate properties with little or no market transactions such as schools and churches.

Other method would be the profit method. It is used for the valuation of properties with trading potential and there is no existing recent market rent for similar properties. First, we can obtain the amount of profit by deducting purchases from the estimated amount of the company’s earnings, which is divided into 2 parts, for the tenant and the landlord. Using the tenant’s profits, we will be able to find out the capital value of the property.

The last method would be the residual method. It is usually used to valuate properties which are undeveloped, have buildings that would-be upgraded or have no economic value, and awaits demolition and replacement. The value which can be obtained by deducting the expenses from the estimated value of the property after development is the residual value.
Among the five methods, the first three are the more commonly used ones. Using these methods, you will be able to estimate a value for your existing property.


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