3 Approaches to Property Valuations

May 11, 2022

A property valuation is the process of finding the market value of any property. This may be any sort of property including residential or commercial.

At Adelaide Property Valuers Metro there are a range of services to choose from, as there are quite a few different reasons someone may need to have a property valuation completed for either their home or commercial property. For each reason, there would be a specific method used to calculate the property so that it suits the purpose of the valuation.

For example, if you are after a valuation of your own personal home for compensation or insurance reasons, calculating the income it could generate in a year might not make sense unless it is partly rented out, an investment property, or also used to operate a business.

There are 3 ways a certified property valuer may approach your specific valuation.

1. Direct Comparison Approach

When a valuer uses a direct comparison approach, they will thoroughly research the local property market to find comparables. A comparable is a property that is almost exactly the same as yours in every way. If the comparable property is lacking in some way or another, then it will be considered an inferior property. If it is your property that is found lacking from another, for example, the comparable property has a newly renovated kitchen and yours does not, then that will mean it is a superior comparable.

Ideally, the comparable property will be neither superior nor inferior. If it is, the valuer will need to include this detail in their property valuation report.

Valuers investigate comparable properties that are currently listed on the market within the same location as your property. The best comparable properties will be within 1km. Recent sales data of comparable properties are also considered. The sale of the comparable property must have been within the last 6 months. The value of property within the market can change at any time, so for a more accurate valuation, some valuers may choose to only look at sales from the last 3 months.

2. Income Approach

The income approach to valuing a property is primarily based on the property’s ability to generate income. This is different from the rental income. The income this form of valuation refers to is the net income produced by the property.

The net income is what is used to calculate the value of the property. To calculate, valuers will use the following formula:

value = net income ÷ capitalisation rate

As seen above the property value is found by dividing the net income by the capitalisation rate. The capitalisation rate, also referred to as “cap rate”, is the rate of the return on your investment. This rate is presented as a percentage.

3. Cost Approach

With a cost approach, a property valuer will investigate every element of a property to determine its current market value. These elements can be large or small, but each will have an influence on the property value. The cost approach of a property valuation involves an inspection of the property’s…

  • Overall size of the building/ structure and the land
  • Quality of the land and soil with consideration of its topography
  • City or Suburb, location, and distance to the available amenities such as gyms, schools, shopping centres
  • Architectural design
  • Energy efficiency
  • Quality and condition of fixtures and features

This is certainly not everything a valuer may examine with this approach. Once they have determined every detail that influences the property value, they calculate its value and contribution. The sum of these values will then form the total property value.

To determine which approach is best suited for your property valuation, consult with a certified professional valuer.

 

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