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Understanding the different methods of property valuation

Property valuation serves a wide range of purposes, including financing, sales listing, investment feasibility analysis, insurance, loans, and taxation. Accurate property valuation is essential to make informed property investment decisions. 

Property valuation for residential and commercial real estate requires experience and expertise in the different valuation methods. You need to learn about the different valuation methods that are out there to choose the one that would work the best for you. 

Below we will share with you different property valuation methods that you can use to calculate the estimated value of your property. 

Real Estate Valuation Overview

Real estate valuation is the process of finding the estimated value of a property. The process involves the use of an appropriate valuation method based on the size and the type of property that you own. 

Certain valuation methods work best for commercial real estate. At the same time, others are ideal for the valuation of residential properties

Property valuation is crucial for various reasons, including financial reporting and the selling or buying of real estate. 

Importance of Property Valuation

To understand how to put a property’s value, it is recommended that you consider an appraisal. This valuation is especially important if you are about to buy or sell a home. 

Also, the value of the property can help you determine what rent may be fair and competitive, helping you find the ideal renter.

Property valuation is vital when purchasing or renting real estate. Even if an individual chooses to lease their real estate, valuation of real estate is essential. The rental fee for property usually equals 6 to 10 percent of the estimated value of the real estate.

When a buyer needs a loan against the security (i.e., if the buyer wants to borrow against the property value), the valuation of the property is important in case a loan for the construction project is needed for successful completion.

Understanding the Different Methods of Property Valuation

Cost Method

This model considers the cost to rebuild the structure from its current state, considering the present value of the land as well as materials and other expenses that would be linked to the replacement of the existing structure.

Due to the uniqueness of each property, real estate appraisers must follow the right procedures when determining comparative value. They should know and be able to value the differences between similar comparable properties.

Income Method

A residential house’s potential return on investment is often used as the basis of valuation. This model is based on an estimate of an investor’s probable profit for a given property and the likely reduction in home maintenance costs.

To calculate the buildings’ valuation based on this doctrine, subtract the operating costs from the profitability, which yields the net operating income. Then, divide the NOI by the cap rate.

For example, a building costs AED 1 million, and the expected income is AED 50,000, based on projected figures from a local market report. 

That AED 50,000 per year in income might be enhanced by identifying areas of inefficiency or passing on additional fees to tenants, including electricity or water usage. All expected revenue is discounted to calculate the actual value.

Value Per Door Method 

This method of property value estimation is normally used for commercial complexes, not houses. It considers the total market value of an apartment building based on the number of rooms. 

A two-bedroom apartment with 1,200 square feet in a wealthy land-holding area with a valuation of AED 4 million would be valued at AED 200,000 per unit regardless of the square footage.

Apartment or condo valuation is often calculated based on the square feet involved. This formula is useful for calculating properties that are related to the modifier.

Property Sales Comparison Method

The real estate market method employs a sales history comparison of comparable buildings to help ascertain a property’s fair value. The strategy strives to ascertain the median value of similar properties recently sold in a given area.

For best results, you should select a minimum of three residences within a one-mile radius that sold less than six months ago. 

Value Per Gross Rent Method

The GRM calculation method determines the earning prospects for investment property by taking the asset’s buying price and dividing it by its yearly lease income. In other words, if you buy a property for AED 500,000 and lease it to a lessee for AED 70,000 annually, the GRM would be about 7.14.

Based on the GRM of a property, divide the expense of the rental property by its gross rental income to arrive at an approximate value. 

If the GRM is abnormally high, it may reflect an over-price property, or perhaps there is a matter with the property.

Cost Per Rentable Square Foot Method

Rentable square footage is the sum of a rental site’s usable square footage (the space chargeable to tenants) along with common areas tenants would certainly access, such as stairwells and elevators. 

Then, you can calculate the cost of the rental site by superposing the rentable square footage per square foot with the normal lease cost per square foot.

To figure out the price per square foot of a rental, take the monthly rent and divide it by the total floor space. That will give you the total monthly price per square foot. The yearly price per square foot can be obtained by multiplying the monthly rate by twelve.

Conclusion 

The real estate property valuation methods mentioned in this article are the most commonly utilised for valuation purposes. 

Selecting the best method out of these depends upon the class of property and the availability of information in terms of market pricing and distinct property features.

Land Sterling is the leading property valuation services provider with commercial and residential real estate valuation expertise. Visit Land Sterling for professional property valuation services in Dubai, UAE.

FAQs

Some of the most widely used valuation methods include:

  • Discounted Cash Flow (DCF) Analysis.
  • Multiples Method.
  • Market Valuation.
  • Comparable Transactions Method.

The reasonably probable, legal, and mutually beneficial use of vacant land or an improved property that is physically possible, competently supported, and financially feasible results in the greatest value.

Here are the most important factors that should be considered when valuing a property:

  • Economic Factors
  • Political Factors
  • Supply and Demand
  • Location
  • The comp set
  • Home Size and usable Space
  • Age and Condition
  • Interest rates

Valuation aims to establish an asset’s or business’s value and contrast it with its present market value.

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Vinodh Mahadevan
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Vinodh Mahadevan

Head of Valuations & Advisory

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