Property valuation is very important for different reasons. This will help you in the financing, analysis of investment, insurance of property and even in taxation. While you enlist a property for sale, value estimation is essential. Here are the details regarding the process to evaluate a property.
Factors Affecting Property Value
There are different factors that determine the value of a property. The value of consumer goods can be realized with the present utility of it. This is not the case with a real estate property. Its value becomes gradually prominent. Regulation of government, economic trends and demand in society creates the value of a property. If all of them are collected, there remain four values to determine a property’s value.
1. Demand – This is the present evaluation of the owner’s satisfaction in the property
2. Utility – It is the ability of the property to satisfy a future owner.
3. Scarcity – This is about what is included in the property.
4. Transfer – This part includes the legal proceedings. Sound legal entity of the property indicates easy transfer of it.
Value And Cost
It is a wrong conception that value of a property is equivalent to its cost. Cost of a property means the physical money that has been spent on it. On the other hand, value is the price that the property can return to the owner. Thus these two are quite different from each other. The value of a property can be easily higher than its cost or lower to it, depending on the above four factors.
Market Value Evaluation
Every property must have a market value. This is the value that indicates the price of the property in the present market condition. However, there is no reason to think that all the properties are sold according to this market value. This depends on the condition of the buyer, the seller and also in the agreement that both are making between themselves. However, market value is something that indicates the value of the property after its appraisal.
Appraisal Styles to Determine Market Value
Appraisal Styles are determined based on few odd things. The factors that are responsible to appraise a property are – The location of the property, the facilities inside, the value a buyer will get from the property both from the internal and external environment and even the legal soundness of the property. Depending on these things, there are few methods of appraisal stated below.
1st Method – Comparison Approach
This is the approach to compare two properties of similar types and with same surroundings. Generally, this is done for the general family houses. One thing is to be evaluated here that no two properties are same in all matters. Hence, few adjustments are always considered while evaluating. Here are the factors that are considered –
a. Condition of the physical property and its age
b. Changes in economic phase between the buildings that are compared.
c. Location advantage or disadvantage, like corner plots are valued more.
d. Size of the building, rooms, square feet, upgrades and internal features like fireplaces or living room spaces.
e. Terms of the seller.
In each case, the adjustments are to be made by the specialists, who are licensed for the job.
2nd Method – Cost Approach
This method is used for different commercial buildings. In most of the commercial houses, the property is expanded in future. Hence each of the buildings is not of same age. Thus each of the buildings is separately evaluated, considering its depreciation value too. The buildings that are evaluated with this approach are usually some income generating real estates. They are not frequently sold.
Generally, these buildings are evaluated on square foot method. There is another thing that is considered here. The buildings that are old enough are to be repaired. So, the estimated value that must be invested in such repairing will be deducted from the entire value.
3rd Method – Capitalization of Income
This is a method that is used to valuate any commercial buildings that generates income for the buyer. It can be an office, apartment and similar earning units like shopping complexes. The valuation of the property is based on the income generating capacity they are having. There are few factors that determine the exact value of property. Following are the factors involved –
1. Losses in Rent collection and vacancy in the property
2. Collection of the income from the investors
3. Net operating income from the property
Real estate valuation is very much important for many professionals too. Mortgage lenders, general buyers and even the investors need them while dealing with any real estate property. So, there are countless benefits, one will get by evaluating a property. If you are going ahead to evaluate your own property, then you should keep the above stated methods in mind. They are to be evaluated according to them, as stated above. Your job is to contact the right agent for the evaluation and check whether they are applying the right method in the process of valuation.