There are a plethora of reasons why you might need a property valuation, especially when you buy a property or sell it! Property valuation is a process that is pretty popular in the West. But thanks to its benefits, the Indian real estate market is also embracing the service slowly.
Here in this guide, we will explain what a property valuation is, the factors affecting property valuation, the importance, and much more.
What is Property Valuation?
As the name suggests, property valuation is the process of calculating the value of any real estate property. In other words, we can say that property valuation is the method of accurately analysing the property's value. Under the property valuation process, the house or property valuation experts start by visiting the property and taking notes and photographs of all the key details of the property.
While valuing the property, the experts consider multiple factors and existing data and, lastly, give you a comprehensive property valuation report that you can use whenever you wish to lease, sell or take a loan against your real estate property. The valuation report gives both buyers and sellers a useful insight into estimating the approximate worth of a property.
A property valuation report can be used when you price your property for listing on the market, when dealing with probate or if you are separating from a partner who owns a part of your property.
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Importance of Property Valuation
There are a handful of reasons that make property valuation an important task. From calculating different taxes on your property to offering a competitive and fair rate for your property, you can precisely do everything once you get your property valued accurately.
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Below are the top 4 reasons why property valuation is important!
1. To buy and sell a property
If you are in a mood to buy or sell your property, it becomes necessary to get it valued. The valuation of your property can help you understand its fair market value. A professional will visit your house during the property valuation process and assess its current worth in the real estate and financial market. The property valuation professional does all this by keeping in mind all the factors that determine the property's value.
2. To rent a property
If you are looking for tenants, property valuation will help you determine the competitive and fair rent for your property. By doing so, you will have an accurate cost for your possible tenants. In general, the suitable rent varies between 2.5% - 3.5% of the estimated property price.
3. For taxation purposes
As a property owner, you are expected to pay multiple taxes on your property, including wealth tax, ground rent tax, municipal tax, property tax, and much more. All these taxes are to be paid to multiple government departments. While calculating these taxes, the estimated value of your property is taken into consideration, and that's why it plays a crucial role in tax calculation.
4. To transfer a property
Finally, if an individual is willing to transfer his/her property to someone else, he/she will be required to estimate the property value first. The estimated value of the property will then decide the stamp duty.
5 major factors affecting the value of a property
Are you wondering about what are the factors that affect property value? From facilities to location, planned infrastructure and size, there are plenty of factors that the value of a property depends on. So, let's have a quick look at what drives property value up and what drags it down.
The location of a real estate property is an important factor that affects the value of a property. If the property is in proximity to schools, shops, restaurants, public transportation and other neighbourhood amenities, then the value of the property will be more. Some properties built beautifully on large plot areas may be valued less because of their bad location, whereas small properties in the heart of the city may be valued more. Simply put, the more famous and accessible an investment location is, the more valuable the real estate property will be.
2. Age and condition
The age of the property plays a crucial role in determining the value of a real estate property. Generally, when the property is new, more homebuyers are interested in paying for it as it does not require any repairs or renovations. In addition to this, the condition of the property also plays a big role in property valuation. The price of a property with less age and good condition will be more than a property that is old and in bad condition. In some cases, people would rather buy a 14-year-old property that is well-maintained than a new property that needs renovations.
3. Supply and Demand
Other major factors that have an enormous impact on the value of a property are Supply and Demand. The push and pull of demand and supply have a major influence on property value. If there is a fixed supply but high demand, the prices of the properties will increase as more and more homebuyers will attempt to buy. In such a scenario, supply can be increased by splitting large properties into several smaller units or building new properties. Conversely, property prices will go down when supply is more than demand.
4. Upgrades and updates
Updates and home renovations can significantly increase the value of any real estate property, especially the ones that are old and have outdated features. Bathroom and kitchen renovations are major improvements that could greatly impact the property's value. The outer appearance or the house's curb appeal can also affect the property value.
5. Home size
Last but not least, the size of the home and usable space has a great impact on the value of a property. For better understanding, usable space includes the spaces like bedrooms and bathrooms that significantly increase the property value. In a nutshell, the larger the home size is, the more will be the property value and vice-versa.
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Different Property Valuation Methods
Below-stated are some of the basic methods that the evaluators use to evaluate the value of the property.
Method 1: Cost method
If there are no comparative property valuations or prices available, property valuation professionals will use the cost method to value the property. Under this method, the evaluators will analyse the average cost of buying a similar property in that area and use that as a comparison to determine the property value.
Method 2: Profit method
If you wish to buy, rent or lease a real estate property for the purpose of running a business there, then the value of the property must match the gross earnings to help the business take home profits. Due to this reason, the property valuation professional will calculate the capital value of the property on the basis of gross revenue and working expenses.
Method 3: Comparison method
The Comparison method of property valuation is used when you plan to buy a property to live in it. Here, the property valuation professionals will compare the current market value of all the properties and plots in that area and use it to create a valuation report. This method is one of the most widely used property valuation methods.
Method 4: Residual method
The Residual method of property valuation is used for real estate properties that are bought with the intention of making changes or renovating in order to increase the value of the same. Most properties bought as investments or developmental properties are valued using the Residual method of property valuation. Under this method, the property is valued by considering the possible profits it may reap in the time ahead.
All in all, the above guide concludes that before carrying out any financial transaction in relation to the real estate property, it is recommendable to get it valued. An accurate property valuation can help you understand the current trends in the real estate market and calculate taxes related to the property. Moreover, it always helps you crack the right deal for your property.