How can two real estate properties that look similar differ in value by hundreds of thousands? This question leads us to the world of real estate valuation, as determining the market value is not done by chance, but rather by study and real experience. Here comes the role of real estate valuation methods as accurate tools that contribute to reaching the value of the property.
In this article, we will explain what real estate valuation methods are, and why choosing the right method is key to determining the real price.
What is real estate valuation?
Real estate valuation is the process of determining the value of a specific property in a specific period of time. This is done based on several specific factors and is done by a certified real estate valuer who studies all the factors related to the property and its position in the real estate market. The importance of real estate valuation lies in the fact that it determines the fair value of the property, which helps in making informed investment decisions and helps the buyer and seller determine the appropriate price when selling, in addition to its importance in real estate financing and else.
What are real estate valuation methods?
They are used by an accredited valuer to determine the market value and are three methods that vary according to the type of property, the purpose of the valuation, and the availability of data:
Comparison method:
The market comparison method is one of the most common and widely used real estate valuation methods, especially in the valuation of residential properties such as apartments and villas. This method is based on the simple principle that “the value of the property is determined based on the prices of similar properties that were recently sold in the same area or have the same characteristics of the property to be sold similar in terms of area, location, age of the property, number of rooms, general condition, and surrounding services.
The most important feature of this method is its reliance on real data from the real estate market, but sometimes it may be difficult to find exactly similar properties
Income method:
It is mainly used to value commercial real estate such as office centers, rental apartment complexes, or hotels. This method is based on looking at the property as a recurring source of income, and its value is determined based on the future financial returns it can generate. In this method, the valuer calculates the property’s annual net income after deducting operational costs such as maintenance, taxes, and management, and then calculates the value of the property after the study.
This method provides a deep analytical view of the value of the property from a financial perspective, and is considered an essential tool for investors who care more about the investment return than the market value. An important challenge in using this method is the need for accurate and reliable data on income and expenses, in addition to a good knowledge of the real estate market and the risks associated with it.
Cost method:
The cost method is mainly used in cases where it is difficult to find similar properties for sale or when the property is of a special type that is difficult to value by market or income, such as hospitals, schools, and government buildings.
This method is based on the principle that the value of a property is equal to the cost of replacing or rebuilding it, and then adding the value of the land. An important challenge for this method is the constant changes in the prices of building materials and labor.
These are the three real estate valuation methods used by the real estate valuer, and more than one method can be used during the valuation.
What are the factors that determine the method of valuation?
There are some factors that a real estate valuer uses to determine the method of valuation, the most important of which are:
- The purpose of the valuation: It is the first step towards choosing the suitable method of valuation. The purpose determines the nature and accuracy of the results.
- Property type: It is one of the essential factors that directly affect the choice of valuation method. Residential properties such as apartments and villas are usually valued using the market comparison method due to the availability of sales data. Commercial or investment properties such as offices and malls are often valued using the income approach, as they generate regular returns. Specialized properties, such as hospitals or government buildings, often require a cost approach due to the scarcity of similar properties in the market. Understanding the type of property helps the valuer choose a method that accurately reflects its true value.
- Data: Each real estate valuation method relies on a specific type of data, so having this data is a prerequisite for successfully applying the method. For example, the market comparison method requires accurate and up-to-date data on the sale prices of similar properties, and the prices of these transactions must be reliable and close in time. The income approach relies on detailed information on rents, expenses, occupancy rates, and return on investment. The cost approach needs data on construction cost and depreciation estimates. If this data is unavailable or inaccurate, it may lead to unrealistic results, forcing the valuer to resort to another method for which data is available.
In conclusion, the choice between real estate valuation methods does not depend on only one factor, but is the result of a careful balancing of several interrelated factors. Making the right decision at this stage is not just a technical step, but a key factor in ensuring the fairness of the valuation and the success of the real estate operations associated with it, whether it is sale, financing, or investment.
At Aain, we have a strong and professional team of accredited valuers. Contact us and evaluate your property with trust with our accredited valuation experts, because every investment decision starts with an accurate valuation.