5 valuation types to help you know how much your property is worth
The world as we know it today is blessed by the ease of access to information, but this availability of information comes with the risk of misinformation and disinformation from various untrusted sources. This can be highly detrimental to DIY knowledge-seekers and there is no exception especially when it comes to evaluating your home in order to list it for sale. Simply put, the property industry is not immune to the impact of inaccurate or misleading information when it comes to valuations.
“Most people are aware of the importance of keeping an up-to-date and accurate valuation of their properties on hand,” According to Schalk van der Merwe, franchisee for the Rawson Properties Helderberg Group.
“This isn’t just for sales purposes: it’s also vital for things like monitoring investment growth, assessing the potential for improvements, and making sure you have adequate insurance coverage.”
There are a wide variety of valuation types and methods designed to give the most useful feedback for each of these cases, however, very few people realise this. If you don’t understand the difference in valuation types, it’s easy to be misguided into thinking your property is valued higher or lower than it actually is on the open market.
Market Value
This is the most widely used and common valuation type that most real estate agents provide to homeowners. This is a general estimation of – being listed at that time – what your property can be expected to sell for on the open market.
It’s not an exact science and as such, for the most accurate results, you need to ensure your real estate agent isn’t just using automated data. They must take their own in-the-field experience of what the current market activity is like and provide you with a well-substantiated document that clearly explains where your property fits into the sales landscape.
Replacement Value
The amount it would cost to replace the land and the building, using materials of comparable quality is known as the replacement value. This is useful for getting an indication of market dynamics, but it’s not an indicator of how much a seller can expect to get for their property in a sale, as it’ll have a new and current market value.
In the event that the replacement value is much higher than the market value, it’s a sign that the market is leaning in favour of the buyer. This is because it would cost more to build a home than to buy an existing home of similar quality. The reverse would favour sellers.
Insurance Value
Insurance value is closely linked to the replacement value, however, it excludes the cost of land but includes any demolition expenses. Essentially, it’s what a property owner would need to pay if their home suffered a major fire, for example, and needed to be partially or fully demolished in order to be rebuilt.
Municipal Value
Municipal valuations can be some of the least accurate among the valuation types. As the name suggests, they are conducted by the local municipality, and these valuations are entirely automated and based on semi-recent sales statistics. They don’t take into account any of the individual property’s unique characteristics. This can drastically leave the valuation at hundreds of thousands of rand off a realistic market value.
Indexed Value
This is a very useful tool for assessing an investment’s performance, but it cannot be substituted for market value. A property’s indexed value is calculated by taking its most recent sales price – how much it cost its current owners to purchase – then adding the average property inflation to that for each year until the present. This shows what that property would be worth if it had experienced average price growth over that time. It can then be compared to a current market valuation to see whether the property has matched, over-, or underperformed the market.
Additional valuations to take into consideration:
Understanding Appraisals
Professional appraisals hold significant importance in property valuation as they provide a credible, independent perspective on a property’s value. Appraisers are certified professionals who evaluate a property based on a comprehensive set of criteria, including the condition of the property, its location, the demand in the market, and recent sales of similar properties in the area.
Their expertise and impartiality ensure that the appraisal is accurate and fair, which can also protect both buyers and sellers from making potentially costly mistakes. Furthermore, banks and other financial institutions often require professional appraisals before approving a mortgage loan, to ensure that the property is a secure investment and worth the amount being loaned. Hence, professional appraisals play an integral role in real estate transactions, contributing to a more transparent and equitable property market.
Factors Influencing Market Value
Several factors can significantly influence the market value of a property. Among the most impactful is location. Properties situated in desirable areas — those with good schools, low crime rates, and easy access to amenities like shopping and parks — tend to command higher prices. Similarly, a property with a great view or proximity to water can also see its value increase.
The size of a property, both in terms of the overall lot and the interior living space, is another major contributing factor to its value. Properties with more bedrooms and bathrooms, or larger plots of land, generally fetch higher prices. However, the efficiency of the space and floor plan can also play a significant role.
The condition of the property can’t be overlooked. A home in excellent condition, with updated systems, a new roof, or renovated kitchen and bathrooms will be worth more than a comparable property in need of major repairs.
Amenities, both within the property and in the vicinity, can also add to a property’s value. Features like a swimming pool, a large backyard, or a finished basement can contribute to a higher valuation. In addition, proximity to local amenities like restaurants, shops, and transportation hubs can boost a property’s appeal.
Finally, current market trends can significantly influence a property’s value. In a seller’s market, where demand outstrips supply, property values can rise. Conversely, in a buyer’s market, where supply exceeds demand, values may fall. Keeping an eye on market trends can help property owners understand when might be the best time to sell or buy.
Negotiation Strategies Based On Property Valuation
Understanding different types of property valuation can provide sellers with a powerful advantage during negotiations. Sellers can use this knowledge to justify their asking price and effectively counter buyer’s offers. Here are a few strategic tips to help leverage valuation during negotiations:
- Emphasize Replacement Value: If the replacement value of the property is high, it indicates the cost of constructing a similar property from scratch would be substantial. Sellers can emphasize this to rationalize a higher asking price, particularly in a buyer’s market.
- Highlight Insurance Value: Sellers can use the insurance value, which includes potential demolition costs, as a negotiating point. This might be particularly effective when dealing with investors or buyers planning substantial changes to the property.
- Use Indexed Value for Long-term Investments: For properties held over a long time, the indexed value can demonstrate the property’s growth compared to the market average. Sellers can showcase this to convince buyers of the property’s investment potential.
- Leverage Appraisal Value: A professional appraisal can provide sellers with a realistic and independent assessment of the property’s market value. Sellers can use this as a baseline for pricing and negotiations.
Understand the Impact of Market and Municipal Value: While these valuations can sometimes present inaccuracies, being aware of them helps sellers anticipate potential challenges. Sellers can prepare to address any significant discrepancies between these values and their asking price during negotiations.
At MMR, we are committed to making your real estate dreams a success and helping you find your new home. Contact one of our sales agents for more market information and investment opportunities. We look forward to hearing from you.
