When looking to sell or rent out a property, the first thing you need to know is how much the property is worth. Knowing how to determine the market value of a property is one of the most important aspects to learn when investing in real estate.
So here are 6 methods you can follow to value your property.
The Comparison Method
This is the most common practice when valuing a property. It is also often referred to as the sales comparison approach or market data approach.
The method starts off by first looking at properties in the same location that have matching criteria such as size and condition. You will then look at their sale prices and compare.
Keep in mind that no property is precisely the same so be sure to also take note to look at all features including square footage and the number of rooms as well as how long they have been on the market for. Try to analyse the comparison with at least four to five comparables to get the most accurate valuation.
In the case that there are no comparable properties in the area, you can follow the profit method to estimate how much you will be able to earn when you sell or rent out the property.
You will need to estimate the two calculations;
- Gross Profit = Gross Earnings - Purchases
- Net Profit = Gross Profit - Working Expenses
The idea behind this method is to determine the value of land that the property is built on as the potential investor should not pay any more than what the actual cost of the building itself.
It is mostly applied to constructed objects that are not sold such as schools or government buildings, not for residential or commercial property. After the land value of that property is determined, it’s combined with the amount it would cost to build that property.
This method is used to determine the value of properties and vacant land with potential for development or redevelopment. You will need to calculate the value of this property by using this equation:
Land / Property = Gross Development Value - (Construction + Fees + Profit)
Although larger properties may take several years to be constructed, the GDV is calculated with current values, not projected values.
The main reason why aspiring property developers use the residual method to value properties and/or land is that this method helps to;
- identify how much one should pay for a development site or
- building in order to actually make a profit.
When all other methods fail, you may use this method that helps property developers determine the value of special and atypical properties.
The basic assumption for the contractors’ method is that the worth of a particular property equates the combined cost of the land and construction on the land.
Use this method to calculate the market value and future value of a freehold interest (the right to grant the leave to another person) of a property. It can be used for properties that provide landlords with a return on their investment in the form of rental income or to help investors determine the current value of a property by looking at the potential profits the property can earn in the future.
To determine the net present value (NPV) of a property, you need to analyse comparable property sales as well as future rental incomes. Calculating backwards to the present day, one can determine the current value of a property, including properties that are yet to be developed.
Using the comparison method, one can determine the price (cost to buy) of a property, as well as the rental one can ask for. With that, one will also know when the rental income and the investment will make profits.
This article was repurposed from a PropertyGuru article.