Methods used for Real Estate Property Valuation

Valuation of the property is an important component of real estate which is used for different reasons like insurance, buying, selling or even in civil disputes too. There are different methods of valuing a property that the surveyors deploy with all of it having its specific pros and cons. The property valuation method chosen may be different according to the purpose whether it is selling, buying or for insurance purposes. We discuss below few of the valuation methods being used and their advantages and disadvantages.

Comparative Method of valuation is based on comparison as evident in the name. This method compares similar types of houses in the same location to come to the relative value of the property in question. This is a method used to often arrive at the open market value which is nothing but a notional value of a knowledgeable mind and an educated person. The comparative value may not represent the actual value of the property and may be higher or lower than the actual value of the property.

Repayment method of valuing the property aims at the price of a property within 12 to 15 years based on the income derived from the property. Therefore a property which has a rental income of Rs. 8, 000 per month will have a valuation of Rs. 14, 40, 000 calculated as under.

Rs. 8000 * 12 months = Rs. 96, 000.

(Yearly Rent) Rs. 96, 000 * 15 years = Rs. 14, 40, 000.

This value of the property can certainly be more modified by taking into account the vacancy period, repair costs, capital cost increment over the years or the value of rental increment over the years. Thus under this valuation method if an investor has to sell the property after twenty years investment term his gross profit would be the rent over the last five years and the capital appreciation over the period of twenty years.

Investment Method:

Investment method of valuation is used for properties which are being tenanted and the valuation is based on the benefits of the rental income. The rent being paid, prospects of growth of rent and the length of the rental period is considered. The valuer considers similar properties in the neighbourhood which have been let out for rent. The derived market rent is then compared with the current rental income of the concerned property and future rental income is ascertained keeping in mind the other influencing factors too.

Development Method or residual Method is the process applied to the valuation of land having a potential after development. This property valuation method is generally used when the developer sells a land plot after developing the land. Thus this method suits the purpose in calculating the profit after development of the land.

Profit method takes into account the profits accruing from a property and translates that into the capital cost considering a plethora of other factors too. This kind of valuation is used majorly for the commercial buildings like the cinema hall, theatre halls, marriage halls, hotels and other public places.

The asset is valued at the present value of the future cash flows. It takes into account the rental income of a residential building and the final sale proceeds received from the sale of the building at the end of the possible investment period. The net profit should ideally be an average of the last three years of profits. Good will is also considered as a part of the profit which influences the rate of return from the property.

The Cost Method or Base value of a property valuation is the cost of the land on which the building is constructed plus the cost of the building added together. The building cost includes materials, labour and any such costs and also the taxes due. This base value is used for the valuation for the insurance purposes, budgeting and scheduling.

Most commonly used method of property valuation

The plinth area is measured and then

The factors which affects the property valuation:

• Location and the available civic amenities.
  
•  Safety and security
  
• Layout of the place
  
• Infrastructure Both physical and social.
  
• Connectivity and communication – Railways and bus connectivity.
  
• And Structure of the property.