The role of real estate valuation
The process of real estate valuation is a key aspect of property ownership, investment and development. It involves using a series of market and financial analysis methodologies to determine the fair market value of a property. Licensed valuers in Adelaide focus on factors such as a building’s location, size, condition and demand.
By determining market value, the property valuation process contributes directly to the stability of the local property market. This value is used by buyers, sellers and investors to ensure they make informed, profitable financial decisions.
Valuations can be performed on residential, commercial and industrial property. Even businesses and plant and machinery assets can benefit greatly from an accurate, legally certified valuation.
Certified Practising Valuers (CPVs) and their methodologies can assist with:
- buying and selling real estate
- calculating your property tax obligations
- delivering supporting documents for property-related legal matters.
Each of these services and methods can be tailored to the needs of the client.
A CPV will leverage their extensive knowledge of the local real estate market and property law across every step of the valuation process. The core of their services involves considering the valuation’s purpose, applying the appropriate valuation methodologies and performing extensive research on the market.
Throughout this article, we’ll discuss how the valuation processes can help you make the most of your property investments in Australia.
The basics of real estate valuation theory
Guaranteeing accuracy in property valuation requires a systematic approach. This is used to calculate either past or current market value. Market value is a core component of any real estate transaction. Not just for independent valuers but for buyers and sellers, investors and the various financial institutions.
Market value refers to the price a property would sell for between two willing parties.
This reflects current market conditions such as supply and demand, economic factors and the condition and location of the property in question.
Highest and best use is another term that valuers commonly refer to. This refers to the most profitable use of any kind of property.
Vitally, that use needs to be:
- legally permissible
- physically possible
- optimally productive
- financially feasible.
This concept is used to help determine the fair market value of a property.
Among the primary components of real estate theory are the three primary approaches to valuation. These are the sales comparison approach, the cost approach and the income approach. They apply in varying degrees for everything from pre-sale valuations to strata insurance valuations.
Each method concentrates on different factors of the subject property. These methods cannot accurately determine market value alone but together form a holistic and accurate valuation.
Real estate valuation methodology
In property valuation, there are numerous methods used to establish market value, each is more or less appropriate than others in specific situations. These are generally divided into the traditional or conventional methods and the advanced or contemporary methods.
The most appropriate method for each situation depends on the type of property, the purpose of the valuation and the availability of essential data.
The traditional approaches are as previously mentioned: the sales comparison, cost and income methods.
The sales comparison approach entails comparing the property in question to others. These properties need to have been recently sold and of similar physical attributes and locality. Valuers based this comparison on over 200 internal and external factors.
These include:
- age and condition
- dimensions
- land area
- renovations, repairs and upgrades.
The income method is generally reserved for the likes of rental or commercial properties. It uses a property’s potential to generate income to estimate its market value.
Finally, the cost method investigates the price of replacing the property if it were to be destroyed. Your valuer will have to determine the cumulative value of all building and administrative costs, materials used and more to establish its market value.
The advanced or contemporary methods
As alternatives to the traditional methods exist a series of complex additional methods with an emphasis on the use of modern technology and strategy.
These are:
- the automated valuation model (AVM) method
- the geographic information system (GIS) method
- the hedonic pricing method.
The AVM method makes use of statistical models based on features such as size and location to predict the property's market value. The GIS method employs spatial data to develop a visual representation of the property. The hedonic pricing method focuses on the market’s demands for various key features of the property in question.
Only a trained, qualified valuer has the knowledge and experience to recognise and work around both the limitations and strengths of the conventional and modern methods of valuation.
Summary
The methods that licensed valuers use to establish fair market value are the core of any valuation and therefore any real estate transaction in Australia. Whether buying, selling or renting property, a CPV can support a good return on investment or help you save money.
Their methods are overseen by the Australian Property Institute (API). This guarantees a certain degree of professionalism, quality, accuracy, transparency and objectivity.
Whether you’re dealing in residential, retail, commercial or industrial property, these rigorous standards and methodologies are crucial in managing, maintaining and improving value. Valuers tailor their approach to your needs and may employ any combination of the traditional and contemporary techniques available to them.
To learn more about the process or receive a free quote on one of our services, reach out to our team of qualified valuers today.