The Real Estate Methods of Valuation: A Basic Guide
Real estate valuations are more complex than you may have thought. There are several ways a valuer will approach a property valuation in Perth as well as three key methods valuers use to conduct a valuation. Here in this blog post, you will learn the basic real estate valuation methodology valuers in Western Australia use to find out the value of your property.
Real estate valuation basics
Before we delve into how real estate valuations are conducted, here are a few things you might need to know.
What is a real estate valuation?
A real estate valuation is a formal and objective process to determine the current market value of any type of real estate. This could be a residential property, like your home, or even a commercial property such as a café or clothing store.
The report written as part of the valuation presents the evidence and factors a valuer has examined and considered when calculating market value. This will include such things as features of the property, its location, and the details of the market at the time of the valuing date.
Who conducts the valuation?
Official valuations are usually conducted by a Certified Practising Valuer (CPV). This is an accreditation given to property valuers that have met the standards of the Australian Property Institute (API) and have passed their intensive application process. A good real estate valuer would have:
- A good education: A real estate valuer would need to have had a university education, with a degree in property valuations to be able to become a qualified valuer. Alternatively, they could complete an API-accredited course to qualify.
- Specialised training: Many professional organisations offer training to further the skills of an already educated valuer. At times this training is merely used to learn new real estate valuation techniques, other types of training allow a valuer to specialise in a particular type of valuation such as the valuation of plant & machinery or industrial property.
- Years of Experience: Most already know the value of hiring an experienced professional and it is no different with a property valuer. To be a CPV, a valuer only needs 2 years of active experience. Most valuers in the industry, particularly those that are specialised, will have many more years of experience.
Why is a valuation important?
A real estate valuation is important in more ways than one. It is a legally certified document, proving the market value of a property at a specified date. Of course, legal matters are not the only reason someone may need to have their property valued. It is sometimes required when completing a transfer duty assessment and when applying for a home loan.
For every purpose, the report is an official statement of a property’s market value. This may be used in saving money during the purchase of a property, paying taxes, and insurance premiums. It determines the amount you are loaned from a bank or lender. The accuracy of a valuer’s report and the methods they have used have a major impact on its use and its outcome.
What are the methods of property valuation
Regardless of why you may want or need this service, a real estate valuer can conduct a property valuation in one of three ways:
- Desktop valuation
- Kerbside valuation
- Full inspection valuation
How a valuer conducts a valuation and the resources they use will influence its price, accuracy, efficiency, and sufficiency. Here’s what you need to know about each of these three real estate valuation methods.
Desktop Valuation
This is the most affordable type of report as a valuer does not need to leave their office to complete it. Everything is completed entirely on a desktop using a computer or laptop. A real estate valuer will have access to certain databases to research the property market and find all the necessary information about the property being valued.
In Australia, it is common to use an app called RP Data from the company, Core Logic, to source the data needed for a valuation. When a valuer conducts a valuation via desktop only, the data available from these online sources are all they use. While usually this results in an accurate valuation, it may not be as precise, comprehensive, or current as one of the next real estate valuation types.
Kerbside Valuation
Some may refer to this as a drive-by valuation as at times a valuer may not leave their cars when conducting this form of valuation. In most cases, a property valuer will walk around the building or house and examine the property from the outside only. When using this seemly bizarre method, a valuer can inspect the property without its occupant needing to be present or to prepare the property beforehand. This makes this a more convenient inspection.
This inspection is not the sole source of the information used to complete a report. The same data and online research that would be done during a desktop valuation will also form a part of this valuation method. The kerbside inspection will merely confirm what was discovered in the databases and refine the final market value.
Full-Inspection Valuation
Most who order a valuation of their property would no doubt be expecting this method. This involves a real estate valuer visiting the property and performing a thorough inspection. They examine every fine detail of a property, including its condition, design, and construction quality.
Again, as with both the kerbside and desktop valuation methods, a full inspection will include comprehensive online research. As this is the most intensive form of real estate valuation, it will result in the most expensive, accurate and precise valuation report.
What types of valuation approaches are used in real estate?
As there are so many reasons you may need a valuation report, there are several property valuation services to choose from. With each service, a valuer will decide on the best way to approach the valuation so that the report best serves the needs of the client. There are three real estate valuation approaches that are commonly used in Western Australia. The three common approaches to real estate valuations are:
- Direct sales comparison approach
- Income approach
- Cost approach
A valuer may not necessarily only use one approach. They may use a combination of different approaches to provide a report that defines the property’s value in a manner that best suits the client’s intentions. Below is a brief breakdown of each valuation approach.
Direct Sales Comparison Approach
The comparison approach to real estate valuation is a highly recommended way of determining market value. It involves looking into recent sales or leases of properties in the local market. A valuer will need to be able to directly compare these properties to the subject that is being valued.
It is nearly impossible to find properties that are almost exact clones of the subject. Even if a recently sold property was designed and constructed by the same developer, the two properties may have had different improvements done over the years and thus be in different conditions. As such, most comparables will either be inferior or superior to the subject property.
Using the sales or rental figures of these comparable properties, combined with their size, a valuer will calculate the market value of the subject. If the comparable is superior or inferior in any way, the valuer takes this into consideration and adjusts their calculations accordingly.
Income Approach
This approach to valuations is normally applied to reports that are made for investors. In general, a real estate investor, who is considering a specific property as a potential investment, would want to have it thoroughly vetted. The income approach is a capitalisation method. To calculate property, the real estate valuer uses the net operating income of the property and determines the capitalisation rate. This creates a report that allows an investor to compare a property to similar properties and determine whether it is a worthwhile investment.
Cost Approach (Summation Method)
Real estate valuers use this approach quite frequently. It can be used as either a primary valuation approach or a secondary approach. It is a complete examination of every factor that contributes to the total market value of the subject property. These factors include:
- The property’s age, size, condition, and location
- Construction and design of the property
- Local economic factors
- Available amenities and their proximity to the property
- Site orientation
- Council zoning and restriction details
The sum of these factors and more create the subject’s property value. This approach has many uses, but its best use is in ascertaining the total cost of replacing an entire building.
Summary
A real estate valuation is conducted for several reasons and as such a valuer will either conduct a desktop, kerbside or full valuation. They normally approach these valuations by either comparing the property to recently sold properties, investigating its investment potential using its net operating income or by completing a sum of the factors influencing its value. These methods and approaches may be combined in a variety of ways to complete a custom report that is made specifically for the needs of its intended purpose and outcome.
For more information about the many methods Perth property valuers use to perform real estate valuations, contact your local valuation firm today.
