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Lets talk Property Valuations

What methods are used & how are values determined

Property valuations are always an interesting discussion; many times resulting in disgruntled or disillusioned owners and for Agents; mandates lost.

The conversation mostly starts & ends around the following factors and debate:

Owners Valuation; 

Professional Valuation; 

Estate Agent Valuation; and

Buyers Final Offer.

Fixed property is an asset in your portfolio like any financial investment. Knowing when to realise your profit (or loss) is crucial to any investors’ personal long term financial strategy. An owner can decide, given the total costs associated with a property investment, what your required return on that investment must be, but the prevailing market ultimately actually sets the price. As you will know “time in the market is what counts and not timing the market”.

I will now cover some of the common methodologies and the general approach to each. Please note this is not an exhaustive list nor is it designed for any other purpose than to inform owners of certain approaches, & to provide some insight into these various approaches.

BUT: at the end of the day the final price will be determined by what a willing BUYER is prepared to pay

Comparative Market Analysis (CMA)

This is the primary methodology used by Real Estate Agents. They are able to access information pertaining to recent sales in the area, values listed versus values sold, property sizes and offerings. They also have a database of properties currently on the market within the area, length of time listed and their values versus advertised sale prices. This information is then analysed, the closest comparisons are then used to arrive at an estimated marketing price range for the particular property in question. This methodology should be transparent to the owner so an informative discussion can be held.

Professional Property Valuation

Whereas Real Estate CMA's are a representation of an owners property competitiveness, a Professional Property Valuation by a fully accredited valuer, is able to provide market valuations which have a legal standing. Typically used in Deceased Estate valuations and more often than not in Commercial Property valuations.  These valuations are normally charged at a % of the valuation.

Income Capitalisation

This is one methodology used by an investor when property is being purchased with the sole intent of renting/leasing the property for a rental/business income return.

Also used in these scenarios sometimes is the Discounted CashFlow (DCF) method as an alternative when the first method fails a test.

Land Residual

This methodology is applied when developers are considering a parcel of land for future development, mostly ignoring whatever improvements are currently on the land as these will probably be demolished. The final expected sale proceeds post development then gets worked back to compare what the current cost of the property is  and thus establish viability.

Return on Investment

ROI (Return on Investment) measures the gain or loss generated on an investment relative to the amount of money invested. ROI is usually expressed as a percentage and is typically used for personal financial decisions, to compare a company's profitability or to compare the efficiency of different investments.

For the purpose of this conversation, one can simply decide what the property can be sold for at a future date, (the profit less all costs), versus what other investment vehicles can I use to better this return or not.

Example: If the property costs R2,0m and you believe you can sell it for R3,0m net in 5 years time, then your ROI would be 8.45% compounded annually if you invested in the property. 

Can you get a better return from any alternative investment? - You must decide.

Replacement Cost

This is the most self-explanatory methodology. Once the current building cost factor is agreed upon (this should of course be a comparative/relative building cost), then one simply multiplies this rate per/m² by the size of the property less the deduction of an element of depreciation, to arrive at a valuation that will be considered the cost to replace the property under current circumstances. Some approaches of this method also make a calculation for the current cost of the land.

This approach is often used when establishing a value for a peculiar property, or an exclusive high-end property where market comparisons are not possible.

FACTORS OUTSIDE OUR CONTROL

  1. Interest Rates
  2. Market Volatility
  3. Economic Environment
  4. Political Environment
  5. National Credit Act
  6. Bank's Lending Policies
  7. Seller's and Buyer's Expectations

The Risk Of Pricing Your Home Incorrectly

Given the above please click on the link to view a short video setting out the Risk Pricing Scenario example and why it's so  important for owners to have their properties priced correctly when listing for sale.

OBLIGATION-FREE OFFER
COMPARATIVE MARKET ANALYSIS Property Valuation

To allow me to prepare a CMA on your property, please contact me via my details below.

Please share this article with your friends or colleagues. Any personal referrals would be appreciated and welcome, and be assured would get my personal professional and educated attention

Best regards,
Ian van Jaarsveld PPRE
Sales Associate PPRE, (MBA)
ian@remax-plett.co.za
+27 (0) 82 494 8771
RE/MAX PRIME PROPERTIES

1st Floor, FNB Building, Main Street,, Plettenberg Bay
South Africa

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