Property Valuation: Meaning, Importance and Valuation Methods

8 Jul 2021  Read 3687 Views

If there is one thing that registers the most number of disputes in India, it has to be property. That’s just one reason why property valuation is of the utmost importance now and in the future. So, here’s your guide to the matter.

As the Czech proverb says, “a good neighbour can increase the value of your property.” Well, does it? Unlike many other consumer commodities, the benefits of property investment are typically recognized over a long period of time. As a result, an estimate of a property's worth must take into account economic and social trends, as well as governmental controls or rules, and environmental variables that may influence the value elements.

So, whether you're looking to buy or sell a home, it's critical to know what you're getting into.

What is Property Valuation?

Property valuation aids one in determining the true value of a property. The value of a property can be used to evaluate the reasonable price of a piece of land, a factory, or a structure. The evaluation of a brand, copyright, intellectual property-related rights, goodwill, and firm performance related to marketing and promotions are all included in property value.

Importance of Property Valuation

Here are the main reasons why the valuation of property is crucial:

1. Purchase /Sell /Transfer of Property

Well, the last thing you want to do while buying or selling/transferring your property is not knowing its worth. If you don't know how much your property is worth, you could end up losing money by overpaying for it or selling it for less than it's worth.

2. To Insure your Property

Having a designated appraisal performed by a third party for insurance purposes is not only a good way to be prepared in the event of theft or damage to your property, but it can also make things easier to facilitate your claim if something undesirable occurs.

3. Taxation

Property Valuation aids in calculating taxes such as property tax, wealth tax, income tax, etc.

4. Property Renovations

It is often considered that making upgrades and renovations to the property will increase the value of the property. But before making any such addition it is important to make sure that you’re investing in the right upgrades. Thus, a good property valuer will provide you with the real value of your property, which can be considered for all of the renovations you are planning for.

5. Property Litigations

Litigations over property are very common these days. In order to do a fair distribution of property, it’s important to get it evaluated.

How to Value Property?

The rigorous collection of data is essential for an appropriate appraisal. To arrive at a valuation, specific data pertaining to the specific property as well as general statistics pertaining to the nation, region, city, and locality in which the property is located, are collected and examined.

To determine the value of a property, appraisers employ one of the following methods:

  • Cost Approach

The cost method assumes that a reasonable buyer would not pay more for a renovated property than it would cost to purchase a comparable lot and build a comparable structure. The cost approach is a real estate property valuation method that examines the cost of the land, plus the cost of replacing the property, i.e., construction expenses minus physical and functional depreciation to determine the worth of a property. This strategy is most typically employed for facilities that are difficult to sell.

However, most evaluators do not believe this procedure is dependable or precise enough for establishing a property's current market value.

  • Income Capitalization Approach

The income approach's fundamental premise is to calculate a real estate property's current value based on the net income it earns. This is done by using the Capitalization rate, which is basically the ratio between net income and current market value.

When the subject property is expected to generate future revenue and its expenses are predictable and consistent, income capitalization appraisals can be quite simple. To estimate net operating income, the appraiser must first collect income and expense statements for the subject real estate property as well as similar properties in the same area. The process of calculating net operating income (NOI) is divided into four steps-

  • Sales Comparison Approach

The Sales Comparison Approach is also known as the market data approach. The sales comparison approach, as the name implies, analyses market data of selling prices to determine the value of a real estate property. This approach of property appraisal involves comparing a property to similar properties that have recently been sold. When appraising single-family homes and lands, the sales comparison method is widely utilized. Comparable properties often have certain characteristics that are in common with the subject property. A few of these are a close resemblance of the subject property, sale under conventional market environment, and sold on a competitive, open market during the last year.

Because no two properties are identical, adjustments will be made to the prices of the comparable sales, to account for differences in features and other considerations such as the age of the property, location, physical features, terms and conditions of sale, etc.

Conclusion

The appropriate technique depends on the kind and usage of the property, as well as the availability of information. Mortgage lenders, investors, insurers, and purchasers and sellers of real estate, all rely on accurate real estate value.

While appraisals are typically performed by skilled professionals, anyone involved in a real estate transaction can benefit from learning about the various methods of real estate valuation.

So the next time you plan to buy/sell/transfer your property, why not try coming up with a rough figure yourself?

About the Author: Utkarsha Kadam | 8 Post(s)

Utkarsha is a chartered accountant with a background in finance, auditing, and taxation. She enjoys simplifying complex financial concepts. She also cherishes sketching and playing badminton in her spare time.

Liked What You Just Read? Share this Post:

Finology Blog / Invest / Property Valuation: Meaning, Importance and Valuation Methods

Wanna Share your Views on this? Comment here: