At first, real estate valuation may seem challenging, but once you know the basics, you’ll understand it better. The area of real estate is vast, covering all sorts of property, from residential to commercial, industrial, and even range and agricultural land.
If you are the owner of or want to invest in real estate in the Northern Territory, an independent property valuation company can assist you. Owning a property comes with a tonne of responsibilities. Investing in real estate is also a big commitment; probably one of the biggest you’ll make in your lifetime.
For commercial and industrial property, financial planning and reporting are especially important. With the help of an expert property valuer, the task can be a lot easier to navigate.
Now that we’ve covered why you need a real estate property valuation, let’s take a look at how it works.
How Does Real Estate Valuation Work?
The process begins once you take the first steps to hiring a valuer. The valuation company that you choose is crucial. If your valuation is inaccurate and the standards were not met, chances are that the decisions you make backed by the valuation will be compromised.
Here are a few examples of scenarios where your decisions will be impaired because of an inaccurate property valuation:
- The cost at which you choose to sell or buy property may be far off. If a valuation is not done properly, you might just end up overcharging as the seller or overpaying as the buyer. A reverse situation can also happen where you undercharge and sell your property at a discounted price. The same goes for leasing a property.
- When seeking building insurance, an inaccurate valuation, or not having one entirely could lead to paying more in premiums or having inadequate coverage. A valuation uses the building replacement cost method, which can be used to better determine the cover required in a worst-case scenario.
- You’ll also need to secure your property as collateral when taking out a loan. If your valuation report isn’t accurate and is less than the loan amount you applied for, the amount that you qualify for will also be less.
After reaching out to a valuation firm, a Certified Practicing Valuer will be appointed and be given instructions to inspect your property. On the day of your inspection, your property will be assessed thoroughly. Its age, condition and structural integrity will be assessed.
Your valuer will then proceed to conduct market research and determine the most appropriate approach to use to complete the valuation to ensure you receive a comprehensive valuation report.
What are the Three Best Ways to Value Property?
The three ways that valuers use to assess real estate are by using the cost, market, and income approach. Below you can find a brief outline of each of the approaches mentioned.
The Cost Approach
This method of valuation calculates how much a buyer should pay for a property. It will be based on how much it would cost to build a new one just like it. The cost of land will also be included in this approach. Although it is an effective approach, only an estimated cost can be calculated. Valuers typically use this approach together with the market and income approaches.
The Market Approach
This method is also known as the market-based or comparison approach. When valuers use this method, they will compare your property to similar ones that are already being advertised on the market.
For this approach to be effective, the other properties need to be similar in size, location, age, and condition. If there aren’t comparable properties and if there isn’t enough information available either, this approach may not be the best one to use. While it is the simplest approach, valuations need to be as accurate as possible. If there is not enough information available, an alternative method should be used.
The Income Approach
Many invest in real estate to generate income and make a profit. Aspiring investors usually request a valuation before deciding to buy a property. In this instance, the income approach will be helpful as it will determine the potential return on investment.
There are quite a few techniques that fall under the income approach. Valuers will use them according to the type of property being assessed. For commercial property, the monthly/annual income, capitalisation rate, and operating costs will all be pre-calculated to determine the property’s potential income.
If the outcome of the valuation is reassuring, the investor can make their final decision to buy into the property. The investor’s decision will be an informed one, based on facts that are backed by research and a comprehensive valuation report.
Are All Types of Real Estate Valued the Same?
The valuation process is similar for most types of property. The same approaches are used and the same factors (size, location, etc.) are all considered during the assessment. There are, however, times when methods of valuation are different.
For example, residential property is often purchased by people who are looking for a home for themselves or their families to live in. In this case, it won't be necessary to make use of the income approach since the property isn't being purchased to generate income or make a profit.
Land, which also falls under the umbrella of real estate, is also valued differently from built structures. Let’s dig a little deeper into how land is valued.
Which Approaches do Valuers use to Value Land?
As stated previously, most types of real estate are valued using the same approaches. Land is no exception. Valuers can also use the comparative market approach and the income capitalisation approach to value land.
Apart from those two methods, there are also the belting, abstraction, allocation, and developmental approaches. Here is a quick explanation of each of them:
- The Belting Method: This method is based on how much of the property is parallel with a frontage line (a main road, shoreline, river, lake, etc). The area of property or land facing a frontage line is called a belt and will influence your plot’s value.
- The Abstraction Method: Valuers use this method to calculate how much your property is worth by subtracting the value of your land from the price you paid for it. It is also called the extraction method.
- The Allocation Method: This approach focuses on finding out how much similar plots of land are sold for. A comparison (presented as a ratio/percentage) will then be made between the value of the plot being assessed and the value of the comparable plots.
- The Developmental Method: This method is often referred to as the residual land value method. If there is a structure on your land that needs renovating, its value will be calculated by its potential to generate income after construction is completed.
Summary
Certified Practicing Valuers are educated and trained to undertake the task of assessing your real estate to determine its value. Because of their high level of education, training, and experience, they will know which methods of valuation to choose for your specific situation and type of real estate.
There are three common methods of valuation that valuers use. They are the cost, market, and income approaches. While plots of land also fall under the category of real estate, there are additional valuation techniques that are used.
Valuations are a straightforward process. While this is the case, you’ll still need an expert who is knowledgeable and experienced in the field.
The real estate valuation company you choose is crucial to the outcome and use of your valuation. Our experts at NT Valuers are also always happy to undertake the valuation of your property. Don’t hesitate to contact us whenever you need one.
