Getting a valuation can be rewarding in the different ways it can be done. By familiarising yourself with the various approaches to property valuations, you can better understand how they affect the report's results.
The different methods of real estate valuations in Canberra were put in place to determine how property should be assessed to determine its value. As different types of real estate serve different purposes, the same valuation method might not be appropriate for all. While this is the case, valuers can still use the same methods of valuation to assess different types of real estate.
Real Estate Valuation Approaches
Do you want to know the different methods of property valuation? We’ll break it down for you.
There are several types of valuation methods that can be used. The three most common methods used by Certified Practicing Valuers (CPVs) are as follows:
- The Direct Comparison Approach
- The Summation Approach
- The Income Approach
Let’s dig a little deeper into these methods of real estate valuation.
The Direct Comparison Approach
Direct comparison is a methodology for assessing real estate based on properties that were recently available on the market. This means that the property in question will be compared to similar properties to determine its current market value.
The direct comparison approach is often also referred to as the following:
- The Sales Comparison Approach
- The Market Data Approach
The Summation Approach
Another name for this method is the cost approach or replacement cost approach. The cost of erecting a brand-new structure serving the same purpose will be taken into account by the valuer or surveyor. From there, the price a buyer or investor will pay for the building under inspection will be determined.
Unimproved value is the worth of a lot of land according to its highest and best use. It is this value that Revenue ACT as well as many other states and territories will base their local rates and land taxes on.
The Income Approach
This approach makes use of the capitalisation rate of real estate. The cap rate is a calculation of the potential income that a property can generate over the course of a year. This will have an impact on its market value and will therefore be considered when a valuer completes the valuation report.
The income approach is often used for commercial real estate that can give its buyer a return on investment or generate a reliable income.
How to do a Valuation of Real Property
If you are looking to get an objective valuation done, a certified property valuation expert should be your first call. In order to be certified, valuers must be members of the Australian Property Institute (API) and the Royal Institute of Chartered Surveyors (RICS).
You can schedule an appointment with an established valuation company. After that, a trained professional will be sent to evaluate the condition of your property. Market data will then be compared, and a report will be completed for you within a few days.
Because CPVs are professionals and come with decades' worth of experience, you will get an in-depth and all-inclusive valuation report.
What do Valuers Consider When Valuing Real Estate?
A number of conditions are considered during the valuation of real estate. There are eight main conditions. They are as follows:
- The size of the building and the land it is built on.
- Its age and condition in relation to its age.
- The number of rooms, offices, bathrooms, or industrial floor space
- Property development restrictions and municipal zoning.
- The average selling price of similar properties nearby.
- The location of the property and the safety and status of the neighbourhood
- Access to public transportation, schools, shops, etc.
- Disturbances like congested motorways, airports and railways.
Other elements that add value to real estate
Have you ever heard of the acronym “DUST” or “STUD” that is used in real estate valuation? They are used to remember the four main elements that have an effect on the value of real estate. Here they are:
- Demand: When there are more buyers interested in purchasing property than there are available properties, the value increases.
- Utility: The presence of functions and amenities that buyers find useful and desirable on a property will have an effect on its value.
- Scarcity: When the availability of real estate is less, the value of available properties increases.
- Transferability: What property is worth when ownership is transferred to someone else can influence its value.
Real Estate Financial Modeling
Investors are able to find better investment opportunities with the help of a real estate financial model (REFM). Now, let’s have a look at what real estate financial modeling is and how a valuation can be beneficial in the process of creating one.
What is real estate financial modeling?
A real estate financial model can be used to evaluate a development project's ability to generate a return on investment. It will examine and outline potential earnings, risks, and losses.
These are all determined by the following:
- The type and purpose of the real estate being analysed.
- Current and future market conditions based on trends.
- The overall cost of the property.
The financial model will then be relayed to the investor in the form of a thorough report. From there, they will be able to decide if they are still interested in making the investment. These financial models are also a great tool for those who have already invested in real estate and want to review what their earning potential could be in the long run.
The metrics of real estate financial modeling
Below are the five fundamental metrics of real estate financial modeling. It is commonly used for commercial property.
- Capitalisation rate (cap rate): calculated by dividing the yearly income potential by the value of the property.
- Net Operating Income (NOI): the overall income of a property, excluding operating expenses like capital expenditure, upkeep, repairs, income taxes and insurance.
- Internal Rate of Return (IRR): a calculation of the possible return on investment and excluding external expenses as mentioned in the point above.
- Loan To Value (LTV): a ratio used to determine whether or not the market value of an asset is enough to take out a loan.
- Loan To Cost (LTC): a ratio used to measure the construction of a commercial real estate project's funding (through a loan) against the final cost of construction.
All the metrics above are used to calculate the real estate financial model. These models are usually drawn up by a business or investment analyst.
Is a valuation necessary for a real estate financial model?
The answer is yes. It will be beneficial to have a valuation report when creating a real estate financial model.
The income approach will feature greatly in the valuation report. The data in the report will also make the job of the business analyst easier. The report can also be used to validate and support calculations that the analyst will be making. This is because valuers are skilled at assessing properties to determine their current values. They do so by adhering to strict international valuation standards.
Property valuation for financial analysis
Financial analysis is important for commercial real estate owners. It begins with reviewing five key elements. They are capital efficiency and solvency, operational efficiency, revenue and profits, and liquidity. An income statement, rent roll, and balance sheet are also used to analyse a commercial property’s financial standing.
Investors, property owners, and business owners can all benefit from using valuation reports during a financial analysis. They can use this information to determine the value of their assets. It will then be possible to determine their financial status.
The ability of a property to operate efficiently will also be determined after a financial analysis. How well it does depends on how effectively it operates.
In conclusion
There are many methods that valuers use when assessing real estate. They can use one or a combination of methods. This depends on the type of property. A Certified Property Valuer will be aware of the best approach for finding the value of various properties. Demand, utility, scarcity, and transferability all play a role in determining the value of real estate and will also be considered.
A real estate financial model can direct buyers and investors towards making more informed financial decisions. Additionally, it can help commercial real estate owners manage their finances better.
A small investment in a certified valuer will help you make bigger and more profitable investment choices later on. Valuations ACT is a reputable valuation company. We only employ local valuers with a wealth of knowledge and experience. Contact us today for a real estate valuation that you can rely on.
