Property valuation is the process which determines the economic value of real estate. The process of compiling a valuation can be considered both art and science, making valuation resources extremely useful. For sellers the correct pricing is vital for a successful sale.
If a property is undervalued a fast sale maybe assured but the money lost will be a painful infliction. Oppositely if a valuation is too high a property may sit on the market for a considerable amount of time, increasing the chance of sellers becoming frustrated and accepting too low a price.
Property valuation typically seeks to determine fair market value, the price at which a knowledgeable seller willingly sells a property and a knowledgeable buyer will willingly purchase it. In other words, it assumes both parties have all the relevant information, and neither are forced to buy or sell. Fair market value is not always equal to the sales price. For example, a short sale of real estate may not bring fair market value because the seller is distressed and must sell the property right away. Potential buyers know this, so they have a bargaining advantage and usually get the property for less than market value.
Property valuation relies on 4 economic factors to create value. Utility, the ability to satisfy a human want, need or desire. All properties must have utility to tenants, investors and owners. Scarcity, the anticipated supply relative to the demand. In general, if demand is constant the scarcity of the land makes it more valuable. Desire, a purchaser’s wish to satisfy human needs, for example shelter, clothing or food. Effective purchasing power, the ability of an individual or group to participate in the market, by acquiring Real Estate with cash or equivalent.
Property valuations are required for various purposes. Required to determine value for:
- Selling/Buying
- Purposes of financing
- Reporting to shareholders
- Cost accounting
- Mergers & takeovers
- Rent Reviews
- Expropriation
- Arbitration
- Litigation
