Whether you are a homeowner or a commercial landlord, your property is probably the biggest financial asset you possess. Deciding what to do with that asset – whether to keep hold of it as an investment or cash in – is based on all sorts of different factors. But a crucial starting point is having an accurate idea of the value of the property at any one time.
There is not one single means of determining property value. Different calculation methods are used by different valuers for different purposes. Understanding these differences is important because, hidden behind the valuation figures, there is a wealth of information about the property which might attract different investors for different reasons.
Comparative valuations determine a property’s value by analysing the market and looking at what similar properties in a similar area recently sold for. As such, there is always an element of estimation about comparative valuations – what one buyer paid for one property a month ago does not determine that the property next door will attract exactly the same amount. This reflects a difference in market value and actual prices paid.
Used most commonly in residential valuations, they are useful when the entire value of the property is contained in its sale price, i.e. there is no income generated from rent or lease. Nowadays, in residential property at least, comparative valuations are regulated against the whims of individual agents by the ready availability of sales information online.
Cost Approach Valuation
Cost approach involves a straightforward calculation which determines the total value of a property as its cost of construction plus the cost of the land it is built on.
The key drawback of cost approach valuations is the problem of assessing construction costs for older properties. Not only do materials and building methods change, but their costs don’t necessarily increase in line with inflation.
Cost approach valuations tend to be used for insurance purposes, for properties that are in a significant state of dilapidation or for special use properties such as libraries or churches. They are useful for homeowners who have invested in significant improvements to their property, as they include an accurate picture of the development costs on top of the comparable market value.
Used for commercial property and rented residential property valuations, an investment valuation calculates the investment yield a property offers. It uses the same standard formula used to calculate all investment yields – net income divided by investment cost, multiplied by 100 to make a percentage.
An investment valuation is most useful to weigh up how attractive a property is as an investment compared to other investment opportunities.
Similar to an Investment Valuation, this approach calculates how long it would take to recoup the purchase price from current rental or lease values, and therefore project how soon investment in a property will turn a profit.
This is useful for considering whether the balance between income and price is likely to be attractive to potential buyers, offering the opportunity to adjust accordingly.
If you would like to learn more about Fairhurst Estates’ commercial property valuation services, visit www.fairhurst-estates.co.uk/professional-services/valuations.