How to do real estate valuation
Real estate valuations are an irreplaceable tool for those involved in the property market. Whether you're a buyer, seller, investor or real estate professional, understanding this process is essential to navigating Melbourne's real estate landscape.
Property valuers in Victoria are trained in real estate valuation theory and are experienced in calculating the fair market value of everything from residential to commercial properties.
Valuation involves reviewing factors like:
- location, size and condition
- comparable sales
- market and economic trends.
Ensuring accuracy in this process is essential due to the significant financial implications involved in property transactions. This is a diverse and dynamic market where the factors that influence property value change rapidly and significantly over time.
Most valuations consist of a combination of the sales comparison approach, cost approach and income capitalisation approach. Each has its advantages and shortcomings.
Valuers will also consider infrastructure development, zoning regulations and more. This may involve utilising bespoke resources, databases and professional assistance to gather essential data and refine your valuation process.
A legally certified valuation, compliant with all the relevant standards, will assist property owners to negotiate effectively, make informed investment decisions and capitalise on opportunities within the Australian real estate market.
Pros and cons of the sales comparison approach
By comparing the subject property to recent sales of similar properties in the same area, it provides a direct reflection of market trends and demand. It also allows for adjustments to be made for differences in size, condition and amenities, ensuring a more accurate valuation.
The availability and reliability of comparable sales data can be a downside, however. There may be a lack of recent sales or limited comparable properties, particularly in niche or specialised markets. This can cause issues in accurately determining the value of the subject property. As a result, valuers tend to rely on multiple valuation methods to determine market value.
This method may also struggle to account for factors like:
- historical significance
- architectural design
- future development plans.
Not accurately accounting for such data could lead to an under- or overvaluation of the property.
Reviewing the cost approach
The cost approach is used for residential, commercial and industrial properties alike. It involves estimating the value of a property by considering the cost of replacing it with a similar one.
This method provides a straightforward approach to valuing new or recently constructed properties. Here, valuers assess the cost of construction, including labour, materials and land acquisition. This can be particularly useful when reviewing unique or specialised properties that may not have comparable sales data available.
The cost approach has its limitations as well.
For instance, focusing solely on the cost of reproduction or replacement, which may not reflect the property's current market conditions, demand or depreciation. This also does not account for older properties that may have features that are not easily reproduced.
The income capitalisation approach
This is the third most commonly used method for property valuations in Victoria. It is reserved for income-generating properties and used for the likes of rental review valuations. It is also suitable for commercial and industrial properties.
This approach involves estimating the value of a property by calculating the present value of its future income. It supports a practical valuation that reflects the property's investment value. This is the method that most accurately reflects market trends and economic conditions.
It considers factors such as:
- rental rates
- vacancy rates
- operating expenses.
This allows valuers to make informed projections about the property's income potential. As with the other methods, however, it has its drawbacks. For instance, it depends heavily on the quality and availability of data related to rental rates, expenses and market trends.
If the data used is inaccurate or outdated, it will affect the accuracy and reliability of the valuation.
Another limitation is its assumption of a stable income stream. The method may not alone incorporate the effects of economic fluctuations, changes in market conditions or unexpected events that can impact the property's income. This may render the results less reliable.
Official standards and guidelines
Property valuers are guided not only by their methods but by a range of official standards, guidelines and regulations that govern these kinds of services.
These play a crucial role in ensuring transparency, consistency and reliability. Such standards provide a framework for valuers to conduct their assessments, helping maintain trust and confidence in the valuation profession. They drive consistency by establishing uniform methodologies, approaches and principles that valuers must adhere to.
Furthermore, they ensure ethical and professional conduct by valuers. This is done by outlining the required qualifications, expertise and experience needed to perform valuations.
These standards mitigate the risk of biased or inaccurate assessments. They also ensure compliance with relevant legislation, such as the Australian Property Institute's (API) Code of Ethics and professional standards, safeguarding against fraudulent or unethical practices. Every valuation is, after all, a reflection of the official bodies who preside over them.
By adhering to valuation standards, valuers instil confidence and trust in their assessments. This serves to grant lenders, investors and the general public faith in the integrity of property valuations.
If you think you could benefit from a real estate valuation, get in touch with one of our licensed valuers today.