Property Valuation Made Simple: How to Value Property

Knowing how to value property is really important when dealing with the real estate market. Whether you’re buying your first home, investing in property, or trying to sell, understanding how to value property helps you make good decisions. 

In this guide, we’ll learn how to value property using different methods like comparing similar properties, the income approach, and the cost approach. We’ll also look at what affects property value, like location, market trends, and property condition.

What are the Key Methods for Property Valuation?

When learning how to value property, there are three main methods to know: the comparative market analysis (CMA), the income approach, and the cost approach. Each of these methods helps in its own way to find out what a property is worth, and knowing the differences is important for accurate property valuation.

Comparative Market Analysis (CMA): This method figures out the value of a property by comparing it to similar properties that have recently sold nearby. CMA is often used for regular homes. By looking at the sale prices of similar houses, you can get a good idea of what the market will pay for a property like yours.

Income Approach: This method is mostly used to value properties that are investments. It figures out value based on how much money the property can make, which makes it ideal for rental properties. This is useful for investors who want to see if a property will be a good investment.

Cost Approach: The cost approach values a property by calculating how much it would cost to rebuild it, including the land and construction costs. This method is especially helpful for newer or unique properties. For example, if the property has a unique design or if there aren’t many similar homes, the cost approach can give a more accurate value.

Each of these methods gives a different view of how to value property, and using more than one method can help you make a better decision. By using these different ways, you can get a clearer picture of what a property is worth, which is important for both buyers and sellers.

Why Accurate Property Valuation Matters

Knowing how to value property correctly is important for several reasons:

Buyers: To make sure you’re not paying too much for a property. A well-informed buyer can make a fair offer that matches the real value.

Sellers: To set a realistic price that will attract buyers. A property that is valued correctly is more likely to get interest and sell faster.

Investors: To see if a property is a good investment and reduce risks. Accurate valuation helps investors decide if the property is worth it and set realistic goals for future returns.

Lenders: To decide how much money they are willing to loan based on the property’s value. Accurate valuations help lenders make sure they aren’t lending too much, which protects their money.

Accurate property valuation is important for planning your finances, avoiding mistakes, and having successful real estate transactions.

A proper valuation helps prevent expensive errors, like paying too much or undervaluing a property, which can lead to financial problems or missed opportunities. 

Market Valuation vs. Bank Valuation

When learning how to value property, it’s important to know the difference between market valuation and bank valuation. These two types of valuations can give different numbers, and knowing why they are different can help you when buying or selling a property.

Market Valuation: This is the value a buyer is willing to pay in current market conditions. It’s influenced by things like location, demand, and the condition of the property. Market valuation is often higher because it shows what people are willing to pay in a competitive market, taking into account features like upgrades and location.

Bank Valuation: This is a more cautious value that lenders use to decide how much to loan. It is meant to protect the lender’s money and may be lower than the market valuation. Bank valuations are often lower because they are meant to reduce risk for the lender and may not consider emotional or competitive factors that affect market prices.

Both valuation types are important for making good real estate decisions. While market valuation helps during negotiations, bank valuation is key for getting financing. Understanding both types helps buyers, sellers, and investors make better decisions during the buying or selling process.

Automated Valuations vs. Manual Valuations

When learning how to value property, it’s also important to know about automated valuations and manual valuations. These are two different approaches to property valuation, each with its own strengths and limitations.

Automated Valuations

Automated valuations, like those provided by Corelogic RP Data reports, use computer algorithms and large datasets to quickly estimate property values. They are efficient and easy to use, but they’re not always super accurate. It takes a bit of time for their algorithms to catch up to the market and provide an estimate of a property’s value. So if you’re in an area with rapid growth, they can easily underestimate the value of a property, sometimes by 10% or more. On the other hand, the valuation report does provide a lot of useful information, so they can be helpful if you want to get a rough idea of the value of your property.

You can also use onthehouse or Property value to get free automated valuations, but they is pretty limited and can be wildly inaccurate. The value of the property could be much higher or lower than they report. They’re good as a starting point but you would need to back it up with your own research.

Manual Valuations

Manual valuations are done by professional valuers who physically inspect the property and consider many different factors to find its value. They are much more detailed, and take into account the local market conditions and recent sales, so they are typically much more accurate.

In practice, many people use a mix of both methods. You might start with an automated valuation to get a basic idea and then do a manual valuation to get a more accurate number that includes all the specific details.

Is it better to use an appraiser or rely on online tools for property valuation?

For property valuation, it’s generally better to use an appraiser for accurate and detailed assessments, especially for unique or high-value properties. Online tools can provide estimates but lack the human insight and context that a professional appraiser can offer to ensure precise property valuation.

Why Accurate Property Valuation Matters

Knowing how to value property correctly is important for several reasons:

Buyers: To make sure you’re not paying too much for a property. A well-informed buyer can make a fair offer that matches the real value.

Sellers: To set a realistic price that will attract buyers. A property that is valued correctly is more likely to get interest and sell faster.

Investors: To see if a property is a good investment and reduce risks. Accurate valuation helps investors decide if the property is worth it and set realistic goals for future returns.

Lenders: To decide how much money they are willing to loan based on the property’s value. Accurate valuations help lenders make sure they aren’t lending too much, which protects their money.

Accurate property valuation is important for planning your finances, avoiding mistakes, and having successful real estate transactions. A proper valuation helps prevent expensive errors, like paying too much or undervaluing a property, which can lead to financial problems or missed opportunities. Knowing how to value property helps everyone involved make smart decisions and reach their goals.

Market Valuation vs. Bank Valuation

When learning how to value property, it’s important to know the difference between market valuation and bank valuation. These two types of valuations can give different numbers, and knowing why they are different can help you when buying or selling a property.

Market Valuation: This is the value a buyer is willing to pay in current market conditions. The market value of a property is influenced things like location, demand, and the condition of the property. Market valuation is often higher because it shows what people are willing to pay in a competitive market, taking into account features like upgrades and location.

Bank Valuation: This is a more cautious value that lenders use to decide how much to loan. It is meant to protect the lender’s money and may be lower than the market valuation. Bank valuations are often lower because they are meant to reduce risk for the lender and may not consider emotional or competitive factors that affect market prices.

Both valuation types are important for making good real estate decisions. While market valuation helps during negotiations, bank valuation is key for getting financing. Understanding both types helps buyers, sellers, and investors make better decisions during the buying or selling process.

How to Value Property: Four Steps to Determine Market Value

1. Find Local Sales

The first step in how to value property is to find local sales of similar properties. This is called a comparative market analysis and is the most common method for valuing a property. Look for properties that have sold in the last six months that are like yours in size, condition, and features. This will give you an idea of what buyers are willing to pay.

You can use online tools, talk to local real estate agents, or check public records to find this information. Try to find properties that are as similar as possible to yours so you get the best comparison.

2. Compare Properties

Next, compare the properties you’ve found. Think about things like location, size of the property, age, and features that might change the value. Make adjustments to make your property similar to the others, which will give you a clearer idea of its value. For example, if your property has a new kitchen but the others don’t, you should increase your value estimate.

Also, think about things like the neighborhood and how close it is to schools, transportation, and other amenities that may affect the value. A good comparison will help you figure out the true worth of your property.

3. Adjust for Differences

After comparing, adjust for any differences between your property and the others. If your property has something extra, like another bedroom or an upgraded kitchen, add value. If it’s missing something, subtract value.

You need to understand the local market and what features add or reduce value. For example, having a big backyard, a pool, or recent upgrades can change the value compared to other properties.

4. Account for Market Changes

Lastly, think about changes in the market when learning how to value property. Adjust for changes in the market since the comparable properties were sold. Look at things like interest rates and local demand since they can affect property value.

If interest rates have gone down, more people might want to buy, which could push prices up. If the economy is struggling, property values might go down. Keeping up with market trends will help you get an accurate value.

Common Mistakes in Property Valuation

Comparing Properties Still on the Market

One mistake when figuring out how to value property is comparing it to properties still for sale. Unsold listings might have high prices that don’t reflect the real value. It’s better to use data from properties that have already been sold because they show what buyers are actually willing to pay.

Over-reliance on Selling Agents

Selling agents may give high valuations to get you to list with them. It’s important to get different opinions and do your own research to understand how to value property correctly. Depending only on an agent’s opinion could lead to mistakes and missed opportunities.

Not Comparing the Right Properties

Make sure you’re comparing properties that are similar in location, size, and condition. Comparing your single-family home to a duplex or a property in a different area won’t give you a reliable value.

Emotional Attachment

If you’re selling your home, you might have an unrealistic expectation of the value of your home compared to what it’s actually worth. For property owners, it’s important to take the emotion out of your evaluation.

Key Property Valuation Terms to Know

Median House Price: The middle price of all homes sold in an area, which helps show pricing trends. Knowing median house prices helps you see if values are going up or down.

Auction Clearance Rate: The percentage of properties sold at auction, which shows buyer demand. A high rate means a strong market, while a low rate means less interest.

Vendor Discounting: The difference between the original asking price and the final sale price, which shows market trends. A high discount means sellers are negotiating more, which can mean a buyer’s market.

Days on Market (DOM): The number of days a property is listed before it sells. A low DOM means properties are selling quickly, while a high DOM might mean the property is overpriced or there’s less demand.

Tools you can use to calculate the value of a home

Here are some tools that you can use that will help you to calculate the value of your property.

Domain Property Value: Provides access to the same tools banks use, offering price information for over 13 million properties in Australia.

OnTheHouse Offers free calculated estimates for over 12 million homes, along with suburb trend analyses to help you understand local market dynamics.

Property Value: Strives to provide up-to-date home valuation information, covering 98% of Australian properties and offering insights into rental and sale trends.

Real Estate View: Features an interactive home value calculator that allows customization based on property details and potential renovations.

MicroBurbs: Provides detailed neighborhood insights along with property values, helping users understand local demographics and trends.

Conclusion: How to Value Property Effectively

Learning how to value property correctly is important for anyone in real estate. By understanding and using different methods—comparative market analysis, income approach, and cost approach—you can gather the required information to make better decisions that help your financial future. Remember to avoid common mistakes, keep up with the market, and make adjustments to find the true value.

If you’re not sure how to value property, reach out to us here at Hunter Galloway. We can give you some assistance with getting an RPData valuation if you are a customer of ours, and we can give you some tips if you’re struggling to find some good comparable properties. Contact us for a free assessment or give us a call on 1300 088 065