Last Updated on June 21, 2019 by Lamudi
Knowing how to appraise the value of real estate properties is one of the most important skills for real estate brokers. While property valuation is best left to certified professionals, a working knowledge of it can also be quite beneficial to owners themselves.
Q: How much is my property worth?
A: How much your property is worth is based on its current market value. The Philippine Valuation Standards, which is the Philippines’ adaptation of the International Valuation Standards, precisely defines market value as:
The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.
The key phrase to take note of here is the “date of valuation,” which is indicative of how your property can be valued differently at different times.
Q: So how do I figure out how much my property is worth now?
A: There are four approaches commonly utilized when appraising property:
This approach is used exclusively to value commercial and investment properties. Essentially, income-producing properties are assessed by applying revenue multipliers or capitalization rates to the property’s net operating income (NOI).
The formulae for Capitalization Rate and NOI are as follows:
Capitalization Rate = Annual Net Operating Income ÷ Cost or Value
NOI = Gross Potential Income – (Vacancy + Collection Costs) – Operating Expenses
Land value is commonly based on the prevalent market value in the area where the property is located. The market value is distinct from the zonal value established by the government. For house and lots, it is best to establish land and building (with its improvements) values separately before summing them up as a whole.
This involves understanding the selling prices of similar properties in the same area as your own. Prices can be obtained via public records, real estate brokers, appraisers, or sellers.
Comparable properties will most likely not be identical to yours, so naturally, adjustments must be made. This could include lot size, number of bathrooms, date of sale, etc. The main idea is to simulate the value of your property using the values of others, with adjustments to make them identical to yours.
Real Estate Valuation
The process of figuring out a real estate investment’s economic value is called real estate valuation. A licensed appraiser can only do this and is utilized in residential and commercial real estate. The state of the market and the capitalization rate are two factors that are taken into account when determining the value of a piece of property. The second one calculates the rate of return on an investment in real estate.
The price of a property (the amount it would cost to buy it) does not always equal its value (the property’s actual worth). The condition, furnishings, and presentation of even two identical residences next to one another might vary considerably. Their values will therefore vary as a result.
Factors Affecting Property Value
Similarly, accessibility is crucial in estimating real estate valuation. Properties that are conveniently accessible by a variety of transportation options are likely to appreciate in value over time. The idea is that a property’s worth increases when the cost to get there decreases (in terms of comfort, money, and time).
Compared to a home situated in a small neighborhood, one close to newly constructed and upgraded regions is more likely to have a more excellent value. This is because developments frequently draw more people, raising the demand for residential and commercial real estate.
Future improvements that can make your property more appealing to the general public must be considered as a house buyer or real estate investor because they will significantly impact its worth. You have to consider the possibilities of the property and the neighborhood before making an investment.
One of the most crucial elements affecting a property’s value is its location. Properties near busy areas typically have better possibilities of appreciating value. Similarly, a property’s value increases with how easily it may be reached.
Are there any schools, restaurants, hospitals, or the city center around the property? Are there fitness centers, stores, parks, or other attractions nearby? If the answer is yes, there is a strong probability that the property will be valuable.
Each of the approaches has its own merit, and when applicable, professional appraisers will often elect to use all three to establish a property’s value. However, for you, as an owner simply looking to know the worth of your property, the cost approach is the most recommended as the values required for this approach is the easiest to obtain. Any changes your property undergoes, whether enhancing or devaluing in nature, can readily be taken into account each time you need to make an estimate.
Remember, you can estimate your property’s worth on your own to get a better idea of its current value and have a basis as you map out its usage and enhancement. However, if you are looking to put it up on the market in the foreseeable future, it is recommended to get advice from a professional appraiser before you proceed.