The process of estimating the value of a property is known as valuation. Valuation gives the buyer and seller information on how to estimate the approximate value of a property. It helps the sellers to decide the price of the property and the buyers in deciding if the investment in the real estate property is worthy or not. Accurate real estate valuations can help property owners make better decisions when it comes to buying and selling properties.
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How can I find the value of my property?
- Look out for comparable properties in the neighborhood or nearby locations that were sold in the last three months. ‘Comparable’ here refers to properties that are similar in size, style, age, and location. In case you have not hired anyone, you will have to research online and analyze current listings in your area or society. Talking to local dealers or neighbors can give you an idea about the price range of a similar property in your area.
- Select three comparable properties that are identical in each and every aspect of your home such as age, size, amenities, and style. For instance, a property that is similar but has extra amenities would be priced higher. Similarly, a property with no car parking/garage would be priced lower. Accordingly, adjustments in the sale price of all three comparable properties are made.
- Once the properties are compared, the final sale price is adjusted by adding or subtracting each amount.
- If the property is comparatively newer, larger in size, and has additional features, the cost is added up to the final sale price. This is perhaps, the most complicated step as it requires a lot of calculations depending upon several aspects of the property. However, a thorough assessment is beneficial in finding the right price for your property.
- Add the adjusted and final sale price of all three comparable properties and find their sum. Divide the sum by three to get an average adjusted final sale price. This amount is the estimated market value of your house.
- For example, there are three properties; A, B, and C which are present in the locality where a person is looking to buy a house. All three properties, i.e., A, B, and C are similar to each other but have different amenities that are provided with the property. Property A is priced at Rs 1,15,000/-, property B is priced at Rs 1,25,000/- and property C is priced at Rs 1,20,000/-. The prices of the three properties are added up and then divided by 3, giving an average price of Rs 1,20,000/-. This amount is the estimated market value of the property.
How can I find the value of my residential property in a commercial locality?
The area or the locality in which the property is situated plays a major role in the value of the property. Localities which are closer to office areas and have an urban setup drive up the price of real estate as compared to a property which is located far from the city and is located in a rural area.
- The development of malls, IT offices, and Special Economic Zones near residential areas help in cutting down the time that is required to commute to workplaces. This also increases the price of real estate in the area.
- The amenities which are present in an area also drive up the value of the real estate property. Amenities such as proper electric connections, telephone lines, sewage facilities, etc. will drive up the valuation along with good infrastructural capabilities like schools, shipping malls, bus terminals, general stores, gymnasiums, children parks, etc.
- The person investing in real estate property has to conduct due diligence with regards to infrastructure and other amenities that are present in the locality. Such amenities and infrastructural structures will drive up the price of the real estate property.
How can I know the valuation of my property in an area with less recent sales?
The valuation of the property may also vary with the number of sales that have occurred in the area where the property is located. An area with frequent sales may have a different valuation as compared to an area with less recent sales. In any case, it is important to calculate the initial valuation of the property before considering other factors.
The following methods can be used to analyze the valuation of the property:
The Comparison method
It involves comparing the recent sales of comparable property (same size, location, condition) that have occurred in the area. These factors are selected and analyzed. An estimated market value can be created based on these factors.
The Residual method
It involves the valuation of property with developmental potential. When calculating the value of the property, it is necessary to take the gross development value minus the cost of development (including the developer’s profit). The residual sum is then the capital that the developer can spend on the property.
The Contractor’s method
This method assesses the costs of providing a modern equivalent property and then adjusts it to reflect the age of the subject property. This method is often referred to as the ‘method of last resort’ due to its unreliability, as the market value is determined by the economic forces of supply and demand.
This method can be applied to determine the market value of a property from its potential to generate future income. The comparable property transactions of sales of other properties are analyzed to find the revenue. The profit is thereafter applied to the future rental income, which is discounted back to the present day giving the net present value (NPV). This is finally used as an indicator of how much the building is presently worth.
How can I determine the income-generating capacity of my property?
Gross Income Multiplier approach
- The gross income multiplier approach is a valuation method that is based on the assumption that properties in the same area will be valued proportionally to the income that they help generate. Gross income is the total income before the deduction of any operating expenses.
- The next step to assess the value of the real estate property is to determine the gross income multiplier. This is achieved if one has previous sale data. Looking at the sales prices of comparable properties and dividing that value by the generated gross annual income produces the average multiplier for the region.
It is important to calculate the valuation of a property before investing in it. Before investing in real estate property, potential buyers must know how to value the property. They should also conduct due diligence regarding the profits that the property may earn. These profits can be either by way of giving the property on rent, or it can also be through the property being highly-priced after the society being developed.