What is a Property Valuation
According to the RICS red book a property valuations is :
Valuation Disputes
Property valuations are often the main area of dispute between buyers, sellers and those lending. Each will have a different approach leading to their perspective valuation. If you consider the following as typical points of view with regards to valuing a property:
- The capitalistic view that a property is worth as much as someone is willing to pay.
- A house in the same street sold for XXX so I want at least the same.
- I heard on the TV that house prices went up by 2% last year so my house must be worth 2% more than it was last year
Given the above, then it's not surprising that a property valuation by a third party can be a source of such conflict. It is in part the reason why those who provide property valuations are regulated by a central body. This central body / organisation is commonly known as RICS : Royal Institution of Chartered Surveyors. As such any RICS registered surveyor / valuer who carries out property valuations has both a code of conduct & strict rules that they must follow. Even so, you could have five RICS registered surveyors / valuers all carry out a property valuation on the same property & arrive at 5 different valuations. All will be close / in the same region, but different.
Why Do Valuations Vary?
Even when a third party RICS valuation is done conflict on valuations still occur due to the fact that the RICS professional tasked with doing the property valuation will have been appointed by different interested party & each party will have their own views that can be either pessimistic or optimistic subject to their position.
In the case of the lender or bank they will be pessimistic by nature so as to reduce the risk to their client's investment. Whereas a property valuation surveyor acting for the seller tends to be optimistic as the seller is trying to get the most money for their property.
Types of Valuation
In general terms there are 5 methods used to produce a valuation of a property or area of land, each being deployed subject to the use / activity of the property / land.
Comparative
This is the method that domestic property buyers will experience the most. As the method name suggests it is where comparisons are made against similar properties that are normally in the same locality / area. See our page How to get the best price for your property for more information about this valuation method.
Investment
Uses discounted cash flow formulae to establish value through the income producing nature of the asset. This valuation method is most commonly used for commercial & homes of multiple occupancy (HMO) valuations.
Residual
This method of valuation is normally deployed when valuing development sites. Taking the cost of developing the land & the gross development value & assigning a value to the land.
Profits
This valuation method is normally applied when valuing commercial properties, business premises such as, hotels, shops and the like where the a percentage of the profits of a business can be attributed to both the nature & location of the property.
Replacement Cost
Normally used for such as, schools, churches etc. Where there is little or no comparable evidence. In such cases the valuation will be based on the cost of rebuilding the property & the cost of the land.