Property Valuation Methods for Real Estate

Property Valuation Methods for Real Estate

By siliconindia   |   Tuesday, March 17, 2015
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Bangalore: Property valuation is a major component of a property transaction. This evaluates the market value of the Real estate property. There are a number of methods for valuing real estate assets; each of it has its pros and cons. Different types of Property Valuation methods may vary depending on whether you are buying, selling or building the property. Depending on the valuation method used, the value of property may vary. Here are the few commonly property valuation methods for Real estate Property.

  1. 1.Comparative Method
  2. Investment Method
  3. Contractors Method
  4. Residual Method
  5. Cost Method/Base Method
  6. Profit Method

Comparative Method: The comparative method is one of the Property Valuation methods which exactly rely on comparison. It includes comparing property values of similar properties from latest sales figures in the market to achieve a capital value for properties and rental yield. The prices may be lower or higher than the actual value.

Investment Method: Another method of Property valuation is Investment Method. This method is based on the discounted cash flow method, taking into account the future cash flows it means a return on investment property, bonds, interest, deposit accounts and flows that the real property can bring to the investor.

Contractors Method: This property valuation method relies on the theory that supposed tenant might consider erecting an appropriate alternative property for their own purposes like if they feel the landlord is asking huge amount of rent or if there is none to rent. This approach generally used in the absence of rental evidence.

Development Method/Residual Method: It is a process of valuing land which has development potential – This Property Valuation method is used where the developer sells a plot of development purpose. This approach is often used for calculating whether a profit can be obtained on a development.

Cost Method: This property valuation method is particularly used when the market is scare. This approach is an estimate of the property replacement value, value of vacant land and buildings loss in value from depreciation. This method adds separate values of the improvements and land.

Profit Method: The name itself suggests that the valuation method deals with profit from a property and consequently capitalizing the same at a proper rate of return depending upon a number of factors. This property valuation method is particularly used to Marriage Halls, Public places, Cinema Theatres and Hotels.

The value of an asset is the present value of future cash flows. From residential building, the investor will receive regular rental flow and also receives sales proceeds on disposal of the property at the end of the investment period.

The net profit should be an average of the last three years of profit. Good will is a part of the profit which reflects the rate of returns.

A Common method of property valuation:

The foremost step in property valuation is to measure the Plinth area.

  • Scrutinize the specifications and factors that affect the property value.
  • Include appropriate Replacement Rate of construction (only for building portion)
  • To get the replacement value, multiply the plinth area by the unit rate.
  • Determine the age of the property and estimate the life of the Building
  • Suppose some percentage age for salvage value and calculate Depreciation by straight-line method.
  • Depreciation Percentage = (Age/Total life) * (100 - % Salvage value)
  • If the age is not clear or crossed its service life, deduce future life and evaluate the depreciation percentage
  • Depreciation is equal to  Depreciation percentage multiplied by replacement value
  • Present Value = Replacement value – Depreciation Value
  • Add other works like amenities, miscellaneous works and any other extra works to depreciated value.

Factors that affect the property valuation:

  • Location and civic amenities
  • Security and safety
  • Layout
  • Infrastructure
  • Demand and supply
  • Good connectivity to airport, railways and bus depot
  • Structure

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