How is real estate valued? You may have wondered about this question. In the real estate market, prices are not just numbers, but rather the result of an accurate real estate valuation based on several methods. The market method is one of the most reliable methods in the real estate valuation process. In this article, we will learn about the market method and its most important principles. 

What does real estate valuation mean?

Real estate valuation is the process of determining the market value of a specific property at a specific time. This is done by a real estate valuation company or a real estate valuer certified by the Saudi Authority of Accredited Valuers. The valuation is based on several factors, including location, property condition, economic factors, surrounding areas, and others. The valuer uses one or more of the three valuation methods: the market method, the income method, and the cost method. 

The real estate valuation process is important for the seller, buyer, and investor, as it helps them to know the true value of the property and avoid the financial risks resulting from inaccurate estimates. The valuation also contributes to increasing confidence in the real estate market and helps financing entities and banks make sound decisions when granting real estate financing.

What is the market method?

The market method is defined as a method that compares the property being appraised with similar properties for which accurate price data is available. The market value is then determined by comparing its characteristics and features with alternatives available in the market, whether sold, leased, or offered for sale or lease. There are two key elements to applying the market method to real estate valuation:

• Comparability: Since no two properties are exactly alike, differences in location, general condition, and legal and economic characteristics must be taken into account.

• Availability of price information: Accurate data on comparable property prices is required to accurately determine market value.

The market method of real estate valuation is based on a set of principles that ensure the accuracy and objectivity of the results, the most important of which are:

• Substitution: This principle assumes that the buyer will not pay more than the cost of obtaining a substitute property that is similar in terms of utility and use, taking into account the absence of time delays.

• Cost: The replacement principle is linked to the cost principle, whereby the cost of constructing a similar property is compared with the property to be valued, and the value is then adjusted based on the differences between them.

• Equilibrium (supply and demand): Prices in the real estate market are determined based on competition between supply and demand. Prices are stable when demand equals supply, but fluctuations may occur due to factors such as population changes, income levels, employment rates, or financing and construction costs.

• Future benefits: This principle focuses on the future economic benefits that the property owner will reap, especially in commercial or investment properties, such as offices and stores. The present value of the expected returns from the property is calculated.

For a certified real estate valuer  or real estate valuation company, such as Aain Real Estate valuation to arrive at an accurate and reliable value for the property using the market method, a series of steps are followed, namely:

• Determining an appropriate time period: The valuer chooses a time frame that reflects current market conditions, so that the data used is related to the most recent real estate transactions, as rapid market changes can directly affect the accuracy of the results.

• Identifying the real estate market: This includes defining the target area or real estate sector, such as a specific neighborhood, group of neighborhoods, or even an entire city or region. The goal is to identify the market environment in which the supply and demand for similar properties can be studied.

• Studying the details of the property being appraised: At this stage, the valuer begins to gather basic information about the property, such as its geographical location, type (residential or commercial), legal and physical condition, and size. These characteristics form the basis for comparison with similar properties.

• Identifying the factors to be evaluated: The valuer identifies the basic elements of comparison that affect value, such as location, area, age of the building, structural condition, and use. These factors help to make accurate and objective comparisons between properties.

• Collecting transaction data or comparison lists: The success of the valuation depends on the quality of the data, so information is collected from multiple sources such as: previous sales of similar properties, lists of properties for sale or rent, data available from real estate brokers, as well as interviews with buyers and sellers to understand actual market conditions.

• Verifying comparisons: After collecting the data, the valuer reviews it to ensure its credibility and currency, and to ensure that the selected transactions or listings accurately reflect market conditions. This procedure limits the impact of unreliable or inaccurate data.

• Comparative analysis and adjustments: Prices are converted into comparable units, such as price per square meter for land and apartments, price per residential unit for villas, or price per room for hotels. The valuer then makes adjustments that take into account differences between properties, such as location, size, structural condition, or additional features such as parking or a distinctive view.

• Deriving the final value: After analysis and adjustments, the weighted market value of the property being appraised is arrived at. This value represents the fair price expected under normal market conditions, i.e., without exceptional influences or unusual circumstances.

• Documenting the results: In the final step, the real estate valuer documents all the data and sources used, indicating their degree of reliability and any challenges faced during the valuation process. This documentation enhances the credibility of the report and makes it acceptable to financing entities and official bodies.

The real estate standard emphasizes that the quality of comparisons is the decisive factor in the accuracy of valuation results. The more recent, accurate, and relevant to the property under review the data is, the closer to reality and more credible the value derived will be.

Finally, the market method is one of the most important methods used in real estate valuation, as it relies on real data to extract the true value. It is not limited to just a number, but rather an integrated vision that helps sellers, buyers, and investors make the right decisions with greater confidence.

To obtain a real estate valuation that reflects the actual value of your property, it is important to seek the help of certified experts.

At Aain Real Estate valuation, you will find a team of real estate valuers certified by the Saudi Authority of Accredited Valuers, who provide you with accurate and reliable valuation services that meet your needs and keep pace with market requirements. Contact us now.