Property Valuation Methods: Conclusion

Finally, the conclusion of the Property Investment Tips series on Property Valuation Methods

As we can see, the three valuation techniques discussed in this series all use different methods to determine the value of a property, and all three have different situations and property types where their use may be more appropriate.

The market data approach determines the value of a property based on sales of similar properties in the area. This is the most commonly used method of residential valuation but has limitations in the fact that all property is heterogeneous and sometimes locating sales of a similar property may be difficult. The cost approach assesses the value of the land and then determines the depreciated cost to construct the building and improvements that exist on the land. This approach is suited to properties that may be difficult to value under the market approach. Properties that have one-off designs, unique construction or special purpose properties are all difficult to compare and so a cost approach may be a better method to use. The limitations of this method become apparent when a building has been built at great expense and is actually worth less than it costs to build; overcapitalisation of a property can be difficult to account for under the cost method. Finally the income, or investment, approach to valuation looks at the income earning potential of a property and bases the value of the property on the projected revenue that the building can earn. This method is extensively used when valuing income producing properties such as commercial buildings, but is not often used in the residential market due to the difficulties in assessing a fair income return on the property. In the case of an owner occupied home, the income potential from the home may be argued as being zero.

The best property investment tip is to use combination of the three valuation methods is recommended. By applying one technique and then confirming this through a second or third method, an accurate idea of the property’s value can be determined. Of course, the more experience that a valuer has in a particular market, the greater ability they will have in determining an accurate value and only one method may need to be applied.

4 comments

  1. I agree it is much better to use all three. Unfortunately a lot of appraisers seem to be more focused on the market data approach. This sometimes compares apples to oranges.

  2. For residential, I was only familiar with the market data approach. And I can see that the income or investment approach would usually be the best approach for rental properties.

  3. I meant to say commercial properties, instead of rental, although the large rental properties would probably combine the market data and the income approaches.

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