What are the main property valuation methods?

Why Get a Valuation Report?

Our clients require valuation reports for a variety of reasons, including taxation, stamp duty, property settlement, purchase and sale, land tax objections, self-managed superannuation funds (SMSF), rental reviews, internal accounting, and many more. Property valuations provide an unbiased opinion on property value and are legal documents that are able to be used in a variety of channels. Unlike a real estate agent’s appraisal, they are accepted for matters requiring accuracy, independence, and integrity. Valuers themselves must possess a high level of training and education through which we are taught the varying methodologies of valuation and the appropriateness of each method in relation to the property under scrutiny.

The methodologies include the Direct Comparison Analysis or Comparative Market Analysis (CMA), the Cost or Summation Approach, the Income Capitalisation Approach, and the Residual Method. We will delve into the nuances of these methods now:

Direct Comparison or Comparative Market Analysis

This methodology is the most widely used in the real estate industry. It involves identifying the attributes of the subject property and analysing other sales that have occurred around the date of valuation and comparing their likeness. These attributes can include construction, age, condition, car parking, bedrooms & bathrooms, elevation, and others. This is a widely used method as it encompasses any market movement or sentiment when assessing the true value of the property.

Cost or Summation Approach

This methodology has a strong focus on the value of the underlying land and the value of the improvements upon the land in their current state. Valuers will estimate the land value, then the depreciated value of the improvements, and add these two figures together. Often a check method in assessing residential property, the Cost or Summation method is particularly helpful when assessing a property that is either unique, new, or highly depreciated.

Income Capitalisation Approach

This methodology is commonly used when assessing commercial, retail, and industrial property, and uses the current rent or estimated current rent received by the property to produce a capital market value. It calculates the value by applying a fair and researched capitalisation rate and applying it to the net operating income (NOI, income after expenses). This method allows investors to evaluate the return on investment and assess the property’s efficacy in terms of cash flow.

Residual Method

This methodology is primarily used to assess the value of development sites prior to a development beginning. The value of the site is determined by subtracting the costs associated with the planned development (including construction) from the estimated future value of the project “as if complete”. Valuers will assess the property based on factors such as land size, zoning, applicable development options, and position, and allows developers to assess the feasibility and profitability of the planned project and adjust costs if necessary.

As shown above, valuation is not merely saying your neighbours house sold for an amount, therefore your property is worth the same. There are a multitude of factors that are taken into consideration by an experienced valuer in order to assess a property accurately, so it is important to choose a valuer with integrity and accuracy. Property is one of the biggest financial decisions most people will make in their lifetime, so it is important to get it right.

Our team are friendly and available to answer any questions you may have regarding your valuation requirements, so give us a contact today – we would be happy to assist you.

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