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The primary reason for owning a property is its value. Estimating a property’s value is necessary for various reasons like property insurance, taxation, investment analysis, sales listing, or financing. Valuation is handy when determining the property’s asking or buying price. Melbourne Property Valuers Metro explains the various property valuation methods a valuer uses.
Why is Property Valuation Important?
Property valuation is a critical pillar in real estate investment. It informs you as an investor on how much you should pay in taxes or how much rent you should charge. It also helps to determine property insurance figures. To know the value of your property, you will need to get a home appraisal. Home appraisal refers to a professional opinion about the value of your property at a specific time. Appraisers evaluate your property to estimate its value based on location and market condition.
The Sales Comparison Approach
The sales comparison approach is the most popular valuation method. Property valuers use it for analyzing the value of land and single-family homes. In this method, your property’s value is arrived at by comparing it with properties of similar characteristics. The properties used in the comparison are called comparables. Additionally, they must have been sold within the last year in an open, competitive market under typical market conditions.
The Cost Approach
A valuer can use the cost approach method to estimate the value of developed property. The primary goal is to ensure that you don’t buy a property for more than it would cost to build it. Your Appraiser uses comparables to estimate the value of the land. They follow by valuing the buildings on-site while considering depreciation. By adding up both estimates, they get the value of the developed property.
The cost approach method is not used to estimate the value of residential or rental properties. It is instead used for properties that are rarely sold and don’t generate income. Examples of such properties are government buildings, churches, schools, e.t.c.
The Income Capitalization Approach
Another property valuation method is the income capitalization approach. Appraisers use this method to estimate the value of income-generating properties like apartment complexes and office blocks. The method is based on the rate of return you need versus the net income a property produces.
The income capitalization method has two appraisal approaches, Direct Capitalization, and Gross Income Multipliers. In direct capitalization, a valuer estimates the property’s annual potential income. Considering vacancy and rent collection issues, the Appraiser arrives at an estimated gross annual income figure. They then get the net income after subtracting expenses. They estimate the net value of a property using the capitalization rate and net operating income.
Valuers use gross income multipliers in valuing properties not meant for income generation but could be rented out. They calculate the property’s gross rental income. Its sale price is then divided by the gross income to get a gross income multiplier which your valuer uses to find the property’s value.
Property valuation is an essential part of real estate investment. With information on property value, landlords, insurers, mortgage lenders, and buyers can make wise decisions. Hire a professional property valuer for accurate figures on your asset’s value.