Finding the value of a property is a vital thing in real estate ventures. Property valuation is developing an opinion of value for a property. The question how much is that house is very common in the real estate industry. There exists an array of definitions of value that assessments seek as follows:
- Market value – this is the price at which a given property would trade in a market where competitors exist. It is also called open market value.
- Value-in-use – the value that a single user of a given property generates under a given use of the property. It may be higher or lower than the market value.
- Investment value – the value of a given property to a single investor. It may also be higher or lower than the market value. Notable though is the fact that the difference between this value and market value is what motivates traders to join a market.
- Insurable value – the value covered under an insurance policy. Liquidation value – value at which a property would trade in a forced or orderly liquidation.
There are three major approaches that people can take to determine the value of a real estate. The strategies are largely interdependent. They are also called “approaches to value” or methodologies for determining value. They are as follows.
a. Sales Comparison Approach
The sales approach is the approach of comparing the features of a property with those of a similar property that recently sold. This method uses the principle of substitution. It assumes that people don’t pay for a property more than they would pay for a similar (substitute) property. It appreciates that buyers will typically compare asking prices and eventually buy the one with the lowest cost yet meets their needs. Data on recently sold properties of similar features (comparables) is collected perhaps from real estate publications, buyers, sellers, real estate agents, etc. This data is used to compare the item in question with its comparables then the value is determined.
b. Cost Approach
The cost approach holds that people will not buy a property for more than it could cost to build an equivalent property. Also called the summation approach, the theory determines the value of assets by adding the value of land to the depreciated value of any value addition ventures done on it. This method is mostly used together with the sales comparison approach. However, it is seen to work better when applied to new structures.
c. Income Capitalization Approach
As the name suggests, the Income Capitalization Approach is a theory that capitalizes an income stream into an indication of value in a commercial income-producing property. Just referred to as the income approach, it evaluates business and investment properties.
It is considered to be the most reliable approach in valuing income-producing properties, mainly because it is usually intended to reflect the trends of market participants.