Property Valuation: The Importance Of Real Estate Valuation

Property Valuation: The Importance Of Real Estate Valuation

What is property valuation? From the first moment you are thinking of selling a property, there is something very important that you have to take into account and that is how much it is worth today.

It is clear that we all want to get the most out of our home, especially if we want to use that money to buy a new one. If we want to avoid having the property hanging without sales mainly because of the price placed on it which possibly can put buyers on their heels then we have to consider property valuation.

This publication will cover all the steps of a property valuation, as well as the importance of property valuation as well as other related phases for contract negotiations.

We must be very clear about what price we are going to put on a property and for this, we depend on the real estate valuation.

The first step to getting a real estate valuation is to go to an agency, where its professionals will take into account a series of objective factors that will determine the value of your property.

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Among all the things that a real estate agent takes into account to value property are the characteristics of the home and its environment, that is, if it is located in a neighborhood that offers services, electricity, green areas, etc.

The real estate agent that makes the property valuation, will make a comparison with homes in the area that are in similar conditions to determine the average price of those homes and based on this, calculate how much your property is worth. 

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Although the Real Estate agency will make an objective assessment of the property, there is always the subjective part of the owner, which is inevitable and depends on the value we give to our home.

However,  the fact that a real estate expert can give us an objective valuation of the property will help to put a real price and that the house can be sold in less time.

What Is Property Valuation?

Property valuation is one of the very important initial steps in the process of selling or leasing property. It is at this point that the amounts to be charged are defined, following all the necessary rules and criteria previously established.

Basic Concepts: Property Valuation

Technically speaking, the value of a property is defined by the current and future benefits of obtaining the property. Unlike many consumer goods that are quickly used up, the benefits of a property are usually received over time. 

Therefore, an estimate of the value of a property must take into account economic and social advantages, as well as government regulations or environmental conditions that can influence the four elements of value:

  • Demand: the desire or need to own, supported by financial assets that support satisfying the desire to buy.
  • Utility: the ability to satisfy the wants and needs of future owners.
  • Scarcity: the finite supply of competitive properties
  • Transfer: the ease with which property rights are transferred to new owners.

Value, cost and price. What’s the difference?

Value does not necessarily equal cost or price. Cost refers to current expenses, such as materials or labor. On the other hand, price is the amount someone pays for something. While cost and price can affect value, they do not determine value. 

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A home’s price range can be $1,000,000, but the value can be significantly higher or lower. For example, if the owner finds a major flaw in the home, such as a foundation problem, the home’s value may be less than the price.

Market price/Appraisal

An appraisal is an opinion or estimate regarding the value of a particular property at a specific date. Valuation reports are used by businesses, government agencies, individuals, investors, and mortgage companies when making decisions about real estate transactions.

The purpose of an appraisal is to determine the market value of a property – the most likely price the property will bring in a competitive and open market.

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Assessment Methods

Method 1: Sales Comparison

The sales comparison approach is commonly used when evaluating homes and land for a family. Sometimes called the market data approach, it is an estimate of value derived from comparing a property to recently sold properties with similar characteristics. These similar properties are called comparable ​​and, to provide a valid comparison, each must:

  • Be as similar as possible to the property in question
  • They were sold last year in an open and competitive market
  • Were sold under normal market conditions

Method 2: Cost-based approach

The cost approach can be used to estimate the value of properties that have been improved by one or more buildings. 

This method involves separate estimates of value for the building(s) and the land, taking into account depreciation. Estimates are added together to calculate the value of the entire improved property.

Method 3: Revenue Capitalization Approach

Often referred to simply as the income approach, this method is based on the relationship between the rate of return an investor requires and the net income a property produces. It is used to estimate the value of income-generating properties such as apartment complexes, office buildings, and shopping malls. 

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Valuations using the revenue capitalization approach can be quite straightforward when the property in question is expected to generate future revenue and when its expenses are predictable and stable.

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Finally, we can conclude that good property valuation is very important for realtors, investors, insurance companies, property buyers, and sellers.

As long as the valuation is carried out by qualified professionals, everyone involved in the proceedings can benefit from gaining basic information on property valuation and also the market value of the land.

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