Understanding Property Valuation

Understanding Property Valuation

When it comes to telling how much a property is worth, there are multiple approaches to take depending on your objectives. Understanding each method of property valuation is vital towards finding the proper price to set for your property and when purchasing property to make sure you are getting a good deal.

Comparable Sales

This is arguably the simplest and most used system of the five for property valuation. The idea behind it is rather straightforward as the price is set by the sale of other, very similar homes in the neighborhood over the past few months. So, if three homes in the past two months that were virtually identical and in the same neighborhood sold for X amount of money, then that is the sale value of the home. Naturally, there may be differences which include the following:

– Distance of Property from Similar, Sold Homes
– Age & Condition of the Property
– Time since the Last Sale
– Number of Bedrooms, Bathrooms, and Spaces in Garage
– Square Footage, Location, and View

Income

This approach is normally used for investment properties or commercial real estate ventures. The price of the property is set by the potential income value. So, there will be considerations of the rent that can be set and takes away the potential expenses along with the average time of vacancy. The rent is usually compared to similar properties that are near the property along with the rates of vacancy.

Cost of Replacement

This is basically setting the value based on the cost it would take to replace the home if it were destroyed by a natural phenomenon such as a tornado or hurricane. This is one of the overlooked factors when getting insurance for the property as owners can chose between selecting the insurance at the amount of the loan or the replacement cost.

Value in the Future

This is certainly the most speculative, but it is one that is embraced by investors as purchasing the right home in the right location can bring considerable financial benefits. This is often used after a revitalization project or development has begun in a certain location. However, the assumptions for the future value can come from many different sources. Of course, the risk in purchasing based on this property valuation method is considerable to say the least.

Best Use

Often called the “Highest & Best Use” this is a very important factor in setting property value especially in times of rapid changes in the market. This often takes the form of replacing the home or structure on the property with something more profitable. So, removing an old, rundown home on a busy street with a strip mall will result in a reset of the property valuation. The highest and best use of the property is an important factor in its value.