When buying a property one of the most difficult or stressful things to decide is how to value a property. Seems simple, right?
Just see what has previously been sold in your local area and you should get a pretty good idea, yes? Or just get an independent survey, correct?
The valuation of residential property is not quite that simple. Commercial property valuation also isn’t so simple. If it were, there would be no need for surveyors or specialists in this field. Questions you would probably be thinking would be, how much should you pay?
You could be wasting thousands of pounds overpaying for a property. Or you could offer too little and have your offer beaten.
The five methods of how to value property valuation
There are Five Methods of Valuation:
- Comparable method
- Investment Method
- Profits Method
- Residual Method
- Depreciated Replacement Cost Method
Part of a valuers job is to know what method to use for a given property in a given market. For the purpose of this article we will focus on the Comparable Method.
How to value a property using the Comparable Method
Being the simplest one, the comparable method focuses on the following. What did similar properties sell for?
You then make appropriate adjustments for differences, time, condition etc to get to an appropriate value. This is most common on residential property.
What is Market value?
According to James Robson Brown, market value is defined as
The estimated amount for which a property should exchange on the date of valuation, between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
How to value a property accurately
For example there might be two sales of £90k and £110k. The person paying £110k did not act knowledgeably and prudently. They paid cash and did not have a building survey. They overpaid because they did not realise the extent of the works needed.
The person paying £90k underpaid because the property was not properly marketed. When valuing property you have to try to understand as much as possible about the comps.
One thing to know when valuing a property is that the last 20% of the value is subjective. Deciding how much a property is worth is an art, which makes the process a little difficult to comprehend. The happiest residential surveyor could be 20% away from the grumpiest, this can stretch to 50% apart with commercial!
You could ask 10 different surveyors & agents and they would most likely give 10 different valuations. This doesn’t help, so at the outset you will be wise to remember a property is only worth what someone is prepared to pay for it. You’re entering an illiquid market which means each individual property is quite different from each other.
Property is not like cars where there are thousands of identical looking Ford Fiestas’ for sale with sales taking place many times in a day. That being said, its basically impossible to generate a ‘perfect right price’ for what an individual property is worth.
When deciding how much a property is worth, the elephant in the room is a principle called ‘intrinsic value’. This is what causes a property to sell above or below the listed price.
Intrinsic value of property
If you don’t know what intrinsic value means, then read on. It simply means what the property means to the prospective buyer. Why the property for sale offers strong positive or negative connotations to a certain buyer.
You can talk about comparable sales prices in the area all you want but intrinsic value is the deciding factor for the majority of residential sales. Have you ever seen a sale where you were quite surprised it sold for that price? A property you thought can’t have possibly sold for that amount? Well that was because it was the intrinsic value taking precedence.
Here is an example of intrinsic value. This will you give you an idea of what to look for when estimating how much a property is worth.
A young businessman is currently living in a 2 bed flat he purchased 6 years ago. He was recently given an opportunity by his employer to relocate in a position that would nearly double his yearly wage. Although it was over 100 miles away, it was too good of an opportunity to miss. The increase in income was a big factor. He initially started commuting nearly 200 miles a day which was taking a toll and was too much to bare.
Then he started looking for new place closer to his new work place. On the way back he saw a property for sale which was a 2 minute walk from his new office. He rang the agent and viewed the property which ticked all of his boxes. It had an office so he could work from home, a conservatory and a big garden for his dog. He currently had to hire a dog walker as there was no outdoor living space.
Remember to make informed decisions
The estate agent informed him that there had already been multiple offers for the property. If he could outbid another buyer he was still with a chance of buying the property. He ran the numbers and then successfully bid £20,000 over the asking price. Why? Because of the petrol he would have said on commuting every day. There was also no need to employ a dog-walker. The stress and overall psychological well-being of not making the nasty everyday commute was more than worth it to him.
You see there can be many other examples that have nothing to do with money. They lean on the emotional or psychological values of the prospective buyer. The point that needs to be stressed is this – there are scenarios that we do not see or know about when you see residential properties sell way above asking price.
What doesn’t appear to make sense to you, may make perfect sense to another buyer. The crux is this. You need to imagine and get inside of the head of protective purchaser. Then make an informed decision on how much a property is estimated to be worth.
When you’re looking at comparable sales prices in your area to determine the property’s worth you need to be aware there may be very strong intrinsic values going on in the background from other prospective buyers.
How much property is sold for is only a guide
This is why sales or sold prices cannot tell you everything you need to know about ‘value’. They may give you a indicator of the likely sales prices that will occur. But neither of them stand to the strength of intrinsic values.
With that being said and before we go into detail and specifics about ‘how to value property’ the first thing you need to do is get to know your local market. You should be able to get to a confident stage of around £5000-£10,000 of how much a property should sell for on an open market.
As well as speaking to agents, pound the street to get to know the kerbside appeal. This will give you a greater knowledge of property values.
How to learn your local property market
Here are best websites to discover how much property in any area has sold for in the last 3 months:
Speaking to at least 3 different agents and surveyors on their options can also be worth your weight in gold. ‘sold prices’ of recently completed transactions on the portals may have become outdated. So the first step would be to find similar properties to the one you want to value. Make sure the property has the same no of bedrooms, street, type, proximity. Then find the sold properties or are on the open market. Work out what has sold and whether it was good value compared with those around it.
Remember if you ask an agent to value how much a property is worth, they will often overvalue the price. This is done to get the property on to their books and win new business. They don’t actually perform ‘valuations’ but offer more of an informal opinion. There is no requirement in law for them to be accurate.
How to compare properties
Usually you will find properties that are in different size, condition, decor, etc. so you would need to make adjustments for the subject property in question. Example, if the next door property sold recently but it was 25% bigger and had a newer kitchen, it would make sense to reasonably scale down the value of the property you are interested in accordingly. The same principle will apply for the state of the repair too. Remember to reduce your offer if major alterations need doing too.
If your builder or a surveyor notes that you need to spend £20,000 re-roofing or because of some hidden defect, you’re in a strong position to reduce your offer to take account of this. The estimated sales price should reflect this. Obviously if this is already factored into the sales price you can either slightly re-offer or not reduce the offer if you’re worried the seller will get offended and put the property back on the market. But the key-aspect is not to get emotional & be objective on how much the property will realistically sell for.
Local property trends
A little known fact by novice buyers is taking the asking price by the seller or estate agent as gospel. Usually asking prices are 10-15% inflated as they know buyers will invariably negotiate. Then again the asking price could be ‘under value’, ‘over value’ or represent the ‘actual value’ (whatever that figure may mean). If you’re offering asking price, you are probably offering too much unless the agent or seller has already reduced the sales price. Propertybee is a good tool to use to determine how much a property price has been reduced by. Propertybee also looks at how long as it been on the market, ‘sold’ and come back on the market.
Another aspect is keeping an eye on the local trend of the property market in the given locality of the subject property. Are property prices rising or falling and how fast? Are there a glut of properties stuck on the property with limited buyer demand? Or are they being ‘sold’ days within coming on the market?
You can use propertybee for this as well as finding out the property’s history. You will easily be able to tell whether the asking price has changed and if the sale has previously fallen through. If you are savvy and have good relationship with the agent you can cheekily ask if the seller is having trouble selling the property so you can factor this into to determine the property’s value.
Speak to other local estate agents
You can also talk to rival estate agents who will often dish the dirt on that particular property if it was previously on their books, and why they had trouble shifting it. They can be honest of their assessment on how much it’s worth if you just take time to build relationships with them and get them on your side.
If the property you’re thinking of buying is leasehold then you will need to make provisions & adjust for the length of the lease. If the lease on the property falls below 80 years unexpired the amount the property is worth rapidly declines with some lenders not even lending. Absent freeholders or management issues all play into the favour of a protective purchaser as the property will be worth considerably less then its counterpart. Any nasties such as neighbours from hell, stone cladding, the old avocado bathroom suit, windfarms, nearby noisy, pubs, pebbledash, flood risk zone, electricity pylons, gas heaters etc all play a vital role of how much the property will be worth.
Once you have gone through the above it is likely they will be pointing in a given direction and you should have it nailed the property’s worth to 5%-10%. Although rudimentary (and all property valuation based on comparable is) these are the best methods we know. Using automated valuations models like Zoopla and Hometrack just aren’t as accurate as a human following this method in my opinion. I see wildly incorrect values from these sources frequently.
In most streets though you should be able to get a feel for the value of a specific property type as long as there are lots of similar ones in the street and using the principles above you should be able to get to a mean value.
What to look out for when you value a property
Before I go through the 2 step process of accurately valuing a property, its important to quickly establish that the true worth of a property has nothing to do with:
- How much the seller paid for it
- The money they have spent over the years ‘refurbing it’ (there is a ceiling price)
- How much they want from the sale
The one truth that you might have heard is “Your property is worth what a buyer is willing to pay for it” (just so long as the buyer’s mortgage lender agrees that the price is fair).
That is the fair price of what a property is worth resonates to:
- The price a similar residential property to the subject property has recently sold for and
- The price a similar residential property to the subject property is currently being listed at (on rightmove)
No matter what anyone tells you, valuing a property is essentially applied guesswork. Until it has been sold and the money is in the bank, nobody can guarantee to the penny how much it will achieve, there are just too many variables. The best anyone can do is look at the information and evidence presented and take an educated guess as to what somebody else will pay for it.
2 step guide on how to value a property
Step 1: Find evidence of sold prices recently
You can easily find sold prices on the Land Registry website or Rightmove, but keep in mind these are filtered through 3 months after the sale has taken place and can become stale or out of date.
Here you are looking for sold prices as close to the subject property (same street or as close as) being the same type and with the same number of bedrooms.
Step 2: What’s on the market now
If 3 sold prices recently sold between £110k-120k and now there are similar properties on the market between £90-£100k you will need to investigate why this is the case.
- Does the market have to many available properties?
- Why are they not selling?
- Are they over or underpriced?
- Are the previously sold prices old data?
You need to be a good detective and uncover the truth about your local property market. Study the comparable properties with a critical and unbiased eye and decide why the property is at a lower or higher price.
Of course they are many facets why a property similar to the subject property can command a higher or lower price tag which on the face of it looks identical:
- It has ensuite bathrooms
- Newly fitted granite & high level kitchen
- Off road parking
- Larger internal square footage
- A bigger garden
- Newly decorated
- Period features
- Well maintained
- A healthy lease (leasehold)
- Double sized bedrooms
- A better property type (detached is better than a semi-detached etc)
- A better location & overview
- An extension & a conservatory and the list goes on.
Our final thoughts on how to value a property
As you can probably digest, the simple answer is that there is no simple answer to exactly determining how much a property is worth. Valuing a property is all about using the comparable evidence, looking at what is on the market, what the estate agents are saying, getting a gut feel, using your knowledge and experience. And it can be very subjective.
More than any other valuation method we favour using the Rightmove sold website to see what has sold in that street/area that is similar recently. As these are completed values and pictures are present it is the best resource for comparing sold prices of Similar residential properties.
You are essentially trying to rationally estimate what the market would pay, when the market may not be rational.
Have a question or wish to find out more? Then simply get in touch with us today and a member of the team will be on hand to help.
