Property valuation is an important part of the real estate market. There are various methods for determining the value of a property. We will introduce you to property valuation using the three most important methods: the comparative value method, the asset value method and the capitalized earnings value method. You will also be provided with information on other factors that influence the value of a property.
A comparison of the three real estate valuation methods
Depending on the purpose for which you want to have your property valued, the cost of the valuation will vary. It is therefore advantageous to know the differences between the three most important methods in real estate valuation.
Comparative value method
The comparative value method is the most frequently used method in real estate valuation. It is based on the assumption that similar properties have similar prices. The value of a property is determined by comparing it with other comparable properties in the area. Various factors such as the size, location, condition and features of the property are taken into account.
The comparative value method is particularly suitable if the intention is to sell or let the property. However, there are also disadvantages: There may be discrepancies between the actual value and the determined value, as the comparative properties are not always perfectly comparable.
Asset value method
Property valuation using the asset value method is based on the assumption that the value of a property is determined by the costs of its construction or renovation. For this purpose, the costs of materials, wages and the contractor’s profit margin are calculated and allocated to the usable area of the property.
The asset value method is particularly suitable for the valuation of new buildings or renovated properties. However, it is less suitable for older buildings, as the costs for their construction are no longer known.
Income capitalization approach
The income capitalization approach is based on the assumption that the value of a property is determined by the future income it can generate. For this purpose, the expected rents or sales proceeds as well as the costs and risks of letting or selling are calculated.
Property valuation using an income capitalization approach is particularly suitable for the valuation of rented properties or properties ready for sale. It also takes into account the future income prospects of a property, which makes it particularly suitable for investment decisions. However, it is also a very complex procedure as it has to take many different factors into account, such as the economic situation, the location of the property and market expectations.
What other factors are important?
It is important to emphasize that a property valuation is not only about the procedures, but also about the experience and expertise of the valuer. An experienced valuer can better assess the differences between the various property valuation methods and decide which method is most suitable. They can also better assess and take into account the uncertainties and risks associated with each method.
Type of property
Another important factor that influences the property valuation is the type of property itself. A single-family home is valued differently than an apartment building, an office building differently than a shopping center. Each type of property has its own specific characteristics that need to be taken into account.
What purpose does the property serve?
A property valuation also depends on the intended purpose. A property that is intended for sale or rental is valued differently from a property that is considered an investment. A property intended for letting is valued in terms of its rental income, while a property considered as an investment is valued in terms of its income prospects.
Current market conditions
It is also important to note that real estate valuation is not static. The value of a property can change over time, depending on how market conditions and the economic situation develop. A regular review of the property valuation is therefore recommended to ensure that the value of a property is accurate and up to date.
Conclusion
Overall, there are many factors that influence property valuation. The comparative value method, the asset value method and the income capitalization method are the three most important property valuation methods used. The valuer and the type of property also play an important role in the property valuation. Careful selection of the right method and an experienced valuer are crucial to obtaining a realistic and fairly determined value of a property. It is also important to know the differences between the methods in order to make the right choice for the situation. Although it is not always easy to determine the value of a property, it is important to do so in order to make investment decisions or to ensure that the property is sold or rented at the right price.
