It is very important to understand the process of property investment valuations, including the different techniques that can be used for a valuation.
An estimate value for a property is generated through the use of certain specialist techniques, in order to have an estimate as to what the property could be sold for. This value is referred to as the Market Value, which is an approximate price for a buyer to pay to the seller for the purchase of the property.
Valuation techniques can also be used to assess the value that an individual has concluded, often known as Worth or Investment Value. It is often the case that an investor will purchase a property if it’s Worth is higher than the Market Value, and therefore sell if the Worth is lower than the Market Value.
There will almost always be differences between an individual’s assessment and the actual Market Value, based on things such as income expectations and requirements. The differences between the opinions and needs of individuals are the reason for such a varied property investment market.
The Royal Institution of Chartered Surveyors has set rules for the valuation process, including rules for definitions, instructions and reporting. The rules can be found in the RICS Valuation Standards; however they do not regulate any of the valuation methods that may be used. In the RICS standards charter there are some methods that are described for valuating, but they are methods that are thought to be commonly used, rather than methods that RICS believe should be used.
To produce an estimate of the Market Vale, the individual conducting the valuation should use the same method that was used by investors that are operating within the specific market in order to finalise a market price.
The present value of future cash flows represents the value of an asset, meaning that an investment valuation method could be used in order to determine expected cash flows and discount them. An investment valuation method that could be used in this instance is an ‘explicit method’, whereby the expected cash flows are determined and discounted at a target rate of return. If the aim is to determine Market Value, then a simpler valuation method can be used by using comparable market evidence in relation to investment prices.
An ‘implicit method’ of valuation consists of using a capitalisation rate and current market rent based on comparable evidence. The capitalisation rate is often referred to as an ‘all risks yield’, with all risks hidden in the selected yield.
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