Property Valuation for Home Buyers: Introduction

Introduction

If you are looking to buy a house, assessing the value of property is one of the central tasks you will have to perform. Home buyers need to decide whether the price of a property reflects the current market price and whether it would be a profitable investment. The price you offer a seller for his house should be based on the results of this assessment.

A good valuation, however, is not your estate agent telling you that the Smiths down the road are trying to sell their home far above value and that you should better keep your hands off it. Appraising the value of a property is a complex issue where many factors have to be taken into account - it is a combination of art and science. If you are really interested in buying a property you should ask a Property Surveyor to perform a Valuation and Survey.

The Faults of Estate Agents

Independent property valuations are only performed by chartered surveyors. It is a common misconception that Estate Agents value property for home sellers. Agents simply guide them to a suggested asking price - they cannot be relied upon to provide objective and accurate valuations.

The asking price an Estate Agent recommends is often over-inflated because of their desire to appease the seller in order to win an instruction. On the other hand, Estate Agents may encourage a seller to accept a below-market offer in order to secure a quick sale (a high turnover is much more profitable for an agent than a small increase in the selling price). Since you cannot be sure about the Estate Agent's motivation and whether the price is above or below market value, it is recommended that you perform an independent valuation.

DIY Valuation

It is perfectly possible for non-professionals to do their own valuations.

Unfortunately, thorough understanding of valuation theory and methodology is not commonplace. There has been little comprehensive literature available as to what constitutes value and what the different methods of determining the worth of a property are. The following article will provide some insight into theoretical approaches to value and valuation methodology.

There are two main theoretical approaches to determining the value of a house, namely the "Comparable Sales Method" and the "Income Approach". A third method, the "Cost Approach", will be discussed briefly, but since it is not an autonomous approach, emphasis will be put on the first two methods. The first valuation method focuses on actual market data, whereas the second calculates the profitability of the investment. Since the two approaches complement each other, a diligent valuation will always have to use both.