What is the Price of your Property? - Valuation Methods | INCOMPROP

All of us sometimes come to a stage where we wonder about the value of our property and if we should sell and move on.  Then most people base their own valuation on asking prices in the market, just to become very disappointed and disheartened when they cannot fetch the expected price for their property.
So, what is the solution when you want to know what a fair price for your property is?
The truth is not so simple, but it might be simpler than what you expect.
There are various methods of determining the value of property, some more popular than others, but I am of the opinion that one needs to look at the bigger picture, before making a final decision.

Wrong price – what now?

Before getting to the methods of valuation, let us just look at the possible results and experience of having one’s property in the market at the wrong price.
Sometimes people put their property in the market for too high a price, for reasons of their own.  The property gets the necessary market exposure, either on a Sole Mandate, or from group exposure via a General Mandate or a Shared Listing.
The property is however exposed to the market at the wrong price and might get over-exposure to the market, with the result that it does not sell.  When the property price is then eventually dropped to a market related price, the market might have lost interest in the property, not believing in the value that is now offered. Alternatively, the market conditions might have changed or slowed down.
The ultimate result is, that because no sale has taken place, the seller is out of pocket. The seller might need to temporarily remove the property from the market and offer it at a later stage as a fresh new listing at a reasonable and market related price.  In the meantime, the seller could have invested the proceeds received if the house was sold and capitalised on the return of the investment.
On the other hand, if one sells a property at below market value, one is also out of pocket.
The lesson that we can take from this is that the wrong price always leads to financial losses.  It is thus important not to be penny wise and pound foolish, but rather get a specialist with the necessary background and credentials to assist with the property evaluation and sales process.

How do I valuate my property to determine a fair market related price?

When we get to the different methods of property valuation, we have found that worldwide there are 5 methods of determining the value of property.  Although the methods could be named differently in different countries, the basic principles and methods are similar.

1.    Firstly, we deal with the Sales Comparison Approach.  This is where the sales of similar, not necessarily identical, properties and related market data is compared and taken into consideration to establish an estimate value. This method has been regarded as the most reliable and is accepted by South African courts
2.    The Income Capitalization Approach, is basically a comparative valuation method based on a market related rental amount or income stream, against which expenses are deducted and then the nett income is capitalised.
3.    The Cost Approach, or Depreciated Replacement Cost (DCR), is based on a calculation of replacement value, less deductions for depreciation. The market value of the land needs to be added to the calculation.  This method is sometimes used in the market where it is difficult or impossible to find comparable sales.
4.    The Residual Approach, is widely used by developers, when determining the value or bid amount for property/land with potential to be developed.  The estimated value of the completed development needs to be calculated. Then the cost factor of development costs and infrastructure, possible demolition costs, costs for advertising and marketing, as well as profit and risk factors need to be taken into consideration. This figure then needs to be subtracted from the estimated development value to determine a fair value for the land. This is then called the residual value.
5.    The Profits Approach, can also be referred to as the accounting method. With this method profits are used as a basis to determine the value of the property.  Basically, an estimated gross annual income or turnover is calculated, against which cost of sales and operating costs are deducted.  The nett balance is then divided into a split between rental and profit.  The rental is capatilised at an appropriate capitalisation factor. Goodwill needs to be calculated at a market related rate and added to the calculation to determine the market value.

When doing a valuation for insurance purposes, the market value of the property is irrelevant.  The valuator must calculate the cost of replacing the bricks and mortar in the instance of where the building is destroyed.  The clearance and removal of any possible rubble must be included in the calculation.  The focus here is solely on the cost of the replacement of the building and disregards the value of the land. This is then the insurance value of the property.

Thinking of Selling your Property – what then?

A reputable and well-established Estate Agency/Property Practitioner is of inestimable value to both sellers and buyers in this process, because normally they have the experience, knowledge and resources to assist clients to make informed and well researched decisions.  Contrary to the popular belief, your Estate Agent/Property Practitioner are in most instances saving their clients’ money in the process.

More related information:
Which Factors Affect Residential Property Price, Returns and Value?

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Author: Erna Rossouw
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