The Basics of a Property Valuation

By: Levi Santiago

Whenever real estate is the subject of conversation, people typically think of the different kinds of properties, their features, and most especially the prices of said properties. One may wonder: How exactly are the prices of real estate decided?

Property Valuation and Its Importance

This is where the concept of property valuation comes into play, which is the process of determining the proper estimation of the value of different real estate properties. There are numerous factors that impact the property valuation of real estate like an RFO house and lot, and it is the proper consideration of these factors that make the process significant, such as “taxation, financing, investment analysis, sales listing, property insurance, and the like.”

Simply put, property valuation is vital in real estate because it determines the “asking or purchase price of real estate.” This kind of information is important to the real estate industry as a whole, such as homebuyers, taxing authorities, lenders, and the like.

Relevant Concepts in Property Valuation

The usage of consumer goods is short-lived. Goods such as food and water are consumed immediately, while goods such as electronic appliances and furniture may last for a couple of years. Real estate, on the other hand, is ascribed to produce benefits to its owners for a much longer period of time. In accordance with this, it is the present measured worth of a real estate’s capacity to produce advantages and benefits to property owners is equivalent to a property’s value.

In assessing the value of property, there are four elements that have a significant impact:

1. Demand

The needs and preferences of persons interested in the ownership of properties

2. Utility

The capability of properties to meet the preferences and needs of the market and property owners.

3. Transferability

The convenience that comes with the transfer of ownership rights regarding properties.

4. Scarcity

The value of the property in relation to similarly competitive properties and their respective capacities to provide utility.

Factors That Impact Property Valuation

1. Interior of the Property

It is commonly observed in brochures that advertise rfo house and lot available for sale that the size and/or floor plan of the property is indicated. One way to view this is that the interior aspects of a property impact its value, including the number of bathrooms and bedrooms in the property, its square footage, construction quality, and the like. Different property interiors target different demographics in the real estate market.

2. Exterior of the Property

Other than the interior of the property, the exterior of the property is also a factor that affects property value. This includes the specifics of the environment surrounding the rfo house and lot itself, such as the landscaping, the quality and size of the lot, and the like.

3. Property Condition

If there are parts of the property that require repair and renovation, this will decrease the property’s value. Examples of this include the sale of properties with postponed maintenance and repair of its plumbing system, roofs, walls, HVAC system, and the like. In addition, older properties usually have lower property value than newer properties since older properties tend to require more repairs and maintenance.

4. Property Location

Location is generally a significant factor in the real estate market. An rfo house and lot that is situated in a neighborhood that has a low crime rate and has access to public infrastructure, major roads, and essential services like grocerieshospitals, and malls, raises property value greatly. Moreover, it is the location of properties that contributes to being competitive in the real estate market amongst similar properties.

5. Market Trends

Generally, property values tend to rise when there is an observed rise in the demand for property ownership in the real estate market. Conversely, when the supply of property in the market is greater than the demand for property ownership, property values tend to decrease.

Different Appraisal Approaches to Determine Property Value

An appraisal, which is done by an appraiser, is essentially the estimation of a property’s value on a particular date. The information from appraisal reports is typically used to make informed decisions in real estate transactions by individuals in the real estate market, including investors, government agencies, mortgage companies, businesses, and the like. Moreover, the purpose of appraisals is to ascertain the fair market value of properties and rfo house and lot in a competitive market.

There are different approaches used in an appraisal, which include the following:

1. Sales Comparison Approach

In this approach, an appraiser compares the real property in question to similar properties that are located nearby, typically those that have been recently sold. These properties that are being compared are called “comparables,” in which if the property in question possesses better quality in terms of the factors that impact its property value, then the said property will be priced higher than the comparables. If, however, the property is in poorer condition than the comparables, then the said property will be priced lower.

2. Income Approach

This approach is generally used to determine the property value of properties that are able to produce income, which includes shopping centers, office buildings, and the like. An appraiser will assess the relevant expenses of the property, such as “vacancy rates, expense statement, rental rates,” and the like, and assess the projections of cash and income flow of the property to calculate the value of the property in question.

3. Cost Approach

For this approach, the property value centers on assessing what expenses there would be to reproduce or replace the property in question; and these expenses are determined to be the replacement cost of the property. Depreciation is also taken into consideration, along with other value estimates of the property in question, to determine the property value. The cost approach centers on the idea that a “reasonable buyer” will not pay for an existing property, even if it has been improved if its sales price is above the expenses needed to build the same property.

Do Property Valuations Expire?

Since property valuations ascertain the value of real estate and possibly your real estate investment, some may question if property valuations expire. The appraiser will conduct an appraisal, which determines the value of the property, like a rfo house and lot, on a specific date. The more recent that the date of the appraisal is, the more certain it is to be used for basis. Otherwise, older property valuations are deemed to be more uncertain given how time changes, inevitably affecting the factors that impact property valuations. In the first place, a real estate valuation is a professional opinion upon the assessment of relevant data during the specific date on which the appraisal was conducted. Therefore, property valuations only become more uncertain the older its date of appraisal becomes, instead of “expiring.”

Read more: Things to Consider When Investing in Real Estate

Related Blog