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There are a number of methods of valuing property, each of which has its advantages and disadvantages. Often, the method changes depending on whether you are building, buying or selling the property in question and despite common misperceptions, valuations of a property can alter significantly depending on the valuation method used.
However, before using any methods to value a property, there is a common means of valuation in Ireland which is known as the Open Market Value. This is not actually a valuation at all but is usually an educated opinion of a property‘s value if it were to be sold on the open market on a given date with reasonable time and conditions to do so. As such, the Open Market Value is not a mathematical calculation of a property’s inherent value using a methodological approach, rather an educated opinion based on assumed market conditions.
Whilst there are many methods of valuation, we will only cover the most popular methods here. These can be summarised as follows:
The comparative method of valuation relies exactly on that - comparison. It involves comparing similar types of houses in a given area to judge the relative value of any particular one. This is the method most often used to achieve the Open Market Value. In order for this to be truly effective in Ireland, it is necessary to know the actual sales prices of the properties, rather than the more commonly published asking prices, however an approximate valuation can still be achieved using the latter.
Another point to make when using the comparative method is that sometimes the prices achieved for a property may not actually represent its actual value. For example a forced or pressurised sale in which a property is sold quickly can often undervalue a given property while similarly, a property owner who requires some of an adjoining field in order to build their dream extension may be prepared to pay a higher price thus overvaluing the property. This should be borne in mind when utilising sales prices as comparisons, as on some occasions, the prices may be higher or lower than what the actual value of a property may be.
Another method of valuation is the repayment option, which aims to repay the price of a property within 12-15 years, based on its income. Therefore taking a property which has a rental income of €600 per month, the value of the property would be calculated as €108,000 based on this method.
This is arrived at by:
Monthly rent (€600) X 12 months = €7,200
Yearly rent X 15 years = €108,000
Of course, this analysis can be further modified by taking into account taxes due, vacancy periods, repair costs or rental and capital increases over the time span involved. If an investor were to sell the property at the end of a twenty year investment term, gross profit would be the rent over the last five years plus any capital appreciation which occurred over the entire twenty year term.
An investment valuation is calculated using the yield from the property. Using the above example, a property on the market has an asking price of €200,000 and a rental income of €600 per month
The yield of the property is therefore (€600 X 12) X 100 = 3.6%
The higher the yield means the greater the return on your investment and using an investment valuation is useful in comparing the returns on a property to other investments such as equity, stocks, bonds or even interest deposit accounts.
Another common method of valuation is the residual value, which in terms of property development, calculates the value somebody may be prepared to pay for a plot of development land for example. The residual value is often useful in calculating whether a profit can be achieved on a development.
At its most basic, the residual value formula can be given as follows:
Value of completed project less total development costs = value of the property in its present condition.
To gain a more accurate residual value however, it would be necessary to include expected appreciation or depreciation in price of the development once complete less total development costs such as financing and interest costs, taxes and even the developer's profit margin which would allow for the true residual value of a site to be obtained.
Therefore using a crude example, if the estimated sales price for a newly built property is €250,000 and the building costs amount to €150,000, the residual value of the site can be calculated at €100,000.
If you were a property developer and you bid above the Residual Value of the site at say €125,000, you would automatically be running at a loss of €25,000 based on the above method.
The cost method or 'Base Value' of a property is the simple cost of the site it is built on and the cost of building the property itself. Included in the cost of building are items such as labour, fit out and any taxes due. The base cost is often a good starting point for valuations required for insurance, scheduling or budgeting.
The reinstatement cost used for insurance purposes are an extension of the base value, allowing for demolition and site clearance fees also. In the reinstatement cost however, the price of the land is not included.