What is Property Valuation?
When we assess the value of a property with respect to the prominent factors that determine it such as location, condition, etc., we call it a property valuation.
Although it’s fairly simple and similar to the usual evaluation of the property that buyers and agents engage in, property valuation requires a professional surveyor. These professionals define a valuation basis as well as the methods they use for the valuation.
Many experts recommend going for professional valuation when they give out tips to buy a new residential property.
This is the framework or criterion under which the valuation is carried out. The basis defines the purpose of the valuation in its entirety while also establishing parameters for the valuation. Purposes of property valuation can range from providing transaction information or secured lending pertaining to company accounts.
Coming up with the market value as well as the market rent can also be the basis for performing a valuation. The surveyor as well as the client can discuss and decide the proper basis for valuation.
Once that is over with, the surveyor then determines the method with which they’ll carry out the valuation.
Methods of Valuation
There are 4 methods that are popular for evaluating properties in various communities in Dubai.
As the name suggests, the comparable method involves taking into account the evidence that is produced from comparable sales. The valuer then uses this data and applies it to the property subjected to valuation.
Evaluators usually use the comparable method for standalone properties such as a house or apartment. Moreover, the properties valued by comparable methods are commonly not generating any income.
In the case of land, this method might make sense but not if the land is under development. The method also becomes obsolete when the situation becomes a bit complex. For example, when the apartment is in a multi-unit property that is further leased to a third party. In such cases, more factors will be involved in establishing its overall value, such as being under-rented, suffering vacancies, etc. Therefore, the market value of the surrounding properties will show incomparable data.
In cases where the comparable method becomes obsolete, the investment method comes into play. It involves capitalising the receivable rental income of the property at an appropriate yield. To do this, the valuer collects data relevant to the property’s previous leases. Then, they present an idea about the rental value an investor can expect.
For example, if there are vacant units in an area, the valuer will make sure to add the estimated time it will take to get a lease. Furthermore, the assessment will also involve the account of running costs that you’re likely to accrue. This will be necessary in order to arrive at the final net income. As might be apparent now, this method also relies on comparative analysis of the surrounding areas.
In the case of valuing a hotel, petrol-filling station or hospitals, surveyors use the profits method. Since it is an exhaustive method that requires insight on not just the property but the business that’s operating on it as well, a specialist who qualifies is necessary.
The specialist should be someone who understands how the business runs and how well it’s doing in the area that is subject to assessment and valuation. This is because the profits method valuation deems it necessary for the specialist to come up with the net operating income. For that, they need to know the details of the operation and the costs one can accrue during execution.
Once they have those values, they can capitalize on it using comparable data from credible and industry-relevant sources. Examples of this can be of valuations people go for when thinking of investing in Dubai Marina hotels, resorts, etc.
Surveyors use the residual method to determine the value of development land. After the development, the valuer deducts the costs you accrue throughout the development process and arrives at the residual land value. To get this, the valuer also accounts for the profit allowance.
Given the entirety of the massive situation that needs to be assessed, residual method valuations are ultimately difficult appraisals that require time. In addition to this, it’s impossible to have a proper appraisal if there have been miscalculations, therefore, it’s imperative that the specialist does it exhaustively.
Considering how some properties don’t have any value of their own, such as a mosque, surveyors apply residual method which is mostly for company accounting purposes. Even in such cases, the valuer will use a depreciated replacement cost method. You’ll hardly find anyone carrying out a residual method valuation in the property market.