Valuing real estate is not a walk-in-the-park kind of process. It requires the right methods to ensure everything is done right. The value of a property is defined by its estimated present and future worth. House valuation is the most crucial factor that you need to consider before purchasing any property.
Importance of Property Valuation
Property valuation is critical because you won't know how much to charge on rent when you purchase a house. You also won’t know how much to pay on taxes if you don’t know the value of a property. You will make better informed decisions when you are aware of your property's value.
Notably, the insurance premiums you pay on a property will depend on its value. It is, therefore, important that you get a good representation of such a property’s value. This will ensure that in the instance you suffer a total loss, then you are well indemnified.
Therefore, this is something that you need to take seriously if you’re looking to get a fair deal on any property. It allows for buyers and sellers to get good value for their money and property respectively.
Here are some of the best ways to know the value of a property before buying.
1. Comparing the Sales Approach
The sales comparison approach is the most popular house valuation method used by a lot of people. It is a method that is mostly used for residential and land real estate. It is also mostly used in single-family homes.
It is worth noting that this method involves comparing the property you wish to buy with other properties similar to it, which includes the price. That is why it is called the comparison approach.
Comparables are the properties used to compare the current property that you wish to buy. In this method, you are usually required to use 3 or 4 comparable to determine the property's value.
2. Property Cost
The other house valuation method you need to consider is the property cost approach. This method involves estimating the amount that it would cost to develop a replica of the property.
Therefore, its main objective is to ensure you don't buy a property at a higher price than it is valued. It is a method that also applies the previous approach of comparing a property with others to ensure that the deal is fair.
This method calculates the costs of building the property you wish to buy and subtracts the depreciation. However, the property cost approach method cannot be used in income property or residential real estate.
It is a method that is ideal for property developed and not sold, such as schools, government buildings, hospitals, and religious institutions. Once the property's land value has been estimated, it is summed up with building cost estimations of the property.
3. The Income Capitalization Method
The third method to consider when it comes to house valuation is income capitalization. It is a valuation method ideal for income properties. These include commercial real estate, multi-family homes, and apartment buildings.
It is a method that considers the ROI and net income of a property that you wish to purchase.
There are two subsections of this method, and they include:
1. Direct Capitalization – It focuses on the income brought by the property
2. Gross income multipliers – Ideal for real estate properties that were not meant to be income properties but later found themselves to be in that category.
House valuation has plenty of methods, and each depends on the kind of property you want to purchase. Therefore, you need to be cautious and make sure that you use the right approach.