Property, land or real estate valuation is a complex process of estimating the worth or market value of a property, putting into cognizance its location (urban or rural), zoning (commercial, industrial or residential), physical characteristics (size and shape of the property, soil quality, presence of natural features like rivers or mountains) and external factors (economic conditions and government policies).

Investors seek property valuation services to assess their property value through a detailed property valuation report they get from the appraiser. The property valuation report enables them to make an informed decision on probate, inheritance, mortgages, insurance, taxes, divorce and the purchase or sale of a property.

The volume of demand for the property, the extent to which the property serves its purpose, the scarcity or availability of that type of property and the ease of transferring ownership are the foundational pillars of real estate valuation.

Since real estate investments are capital-intensive and long-term oriented, investors should analyze potential cash flow and return on investment to determine if it is worth committing their funds to them. The more accurate the real estate valuation report, the more informed the investment decision will be.

Real Estate Valuation Methods
It’s glaring from the previous paragraph that economic, social, environmental and political conditions are instrumental in determining property value. That’s why value differs from price or cost.

There are several methods used to determine the value of a property, each with its strengths and weaknesses. A valuator or real estate valuation company can use one or a blend of three methods to produce a comprehensive real estate valuation report.

Comparable Sales Method
The first method is the comparable sales method or market data method. This method involves comparing the subject property to four or more similar properties recently sold in the area. The timeframe of the earlier sale must not exceed one year, and the sale must have occurred in a competitive market. This is because the market approach assumes that the value of a property is equal to the price it fetches in the open market.

Properties valued with this method must have similar characteristics such as size, location, and physical features and condition of a building. And the real estate appraiser makes an adequate adjustment to account for dis-similar qualities since no two properties are exactly alike. The value of the subject property falls within the range of the adjusted sales prices of the comparables.

This is often considered the most accurate method, as it takes into account market conditions and trends. It is also the most commonly used method by real estate professionals.

Cost Approach
The second method is the cost approach. This method involves determining the cost of replacing the subject property with a similar one, considering the cost of land, materials, labour, and depreciation (deterioration which could be physical, structural, curable, economic or functional obsolescence). Don’t forget to deduct depreciation from the entire cost.

This method is best for new construction or renovated/improved properties. It is best for properties that are not frequently sold and barely generate rental income e.g schools, churches, hospitals etc.

Land value + Construction/Improvement Costs – Depreciation = Property Value

When estimating the land value, assume it’s vacant, and put to its best use.

Income Approach
The third method is the income capitalization approach. This method involves determining the potential income the subject property can generate and then using that income to determine the value of the property. Real estate valuers use this method for properties that generate income, such as rentals or commercial properties.

This method is best when the future income, expenses and subject property vacancy are fairly predictable.

The formula: Rental Income x GIM = Estimated Market Value

(Where: Sales Price ÷ Rental Income = Gross Income Multiplier)

This approach uses sales and rental data from more than three comparables to get its Gross Income Multiplier.

Real Life Scenario
Let’s examine how this works in a real-life scenario.

Comparable Sales Method Scenario
Assuming you want to sell a 3-bedroom detached duplex in Amen Estate Phase 2 and 4 investors sold similar properties in the neighbourhood within the last 6 months for:

₦100,000,000
₦110,000,000
₦95,000,000 and
₦155,000,000
Let’s assume the investor sold the fourth property with state-of-the-art Italian furniture. We can decide to adjust its value by deducting ₦35,000,000 for furniture.

Thus its adjusted value will be = ₦ 155,000,000 – ₦35,000,000 = ₦120,000,000

Therefore, the property value based on this approach = (₦100,000,000 + ₦110,000,000 + ₦95,000,000 + ₦120,000,000) / 4 = ₦106,250,000

Hence, the investor will gladly sell the property for ₦106,250,000 or more, but the same figure or less will be a good buy to the buyer.

Cost Approach Example
In this illustration, Emeka wants to buy a house in a neighbourhood close to Amen Estate Phase 3. If John bought 4 plots of land in Amen Estate for ₦80,000,000 4 months ago, and Emeka wants to buy a 3-bedroom detached duplex on a single plot in the same neighbourhood. We can reliably assume that a plot of land is ₦20,000,000. If the approximate costs of construction, labour, material, etc of building a similar 3-bedroom detached duplex is ₦110,000,000, with an estimated depreciation of ₦10,000,000, the estimated property value will be = ₦20,000,000 + ₦110,000,000 – ₦10,000,000 = ₦120,000,000.

Thus, it will be smart of Emeka to buy a similar 3-bedroom detached duplex for ₦120,000,000 or less. While the seller will prefer to sell it for ₦120,000,000 or more.

Other things being equal, the person who knows the property value stands a better bargaining chance that guarantees their profit or Return on Investment.

Income Approach Scenario
Example 3: Judas Iscariot wants to know his property value. Its annual rent is ₦1,200,000. Assuming 4 other landlords who have identical properties rented theirs for:

₦1,000,000
₦1,200,000
₦1, 300,000
₦1,500,000
Current Average Rental Income = ₦1,250,000

And some other previous landlords sold theirs for:

₦100,000,000
₦110,000,000
₦95,000,000 and
₦155,000,000
Current Average Sales = ₦115,000,000

Gross Income Multiplier = Sales Price ÷ Rental Income = ₦115,000,000 /₦1,250,000 = 92

Estimated Market Value = Rental Income x GIM = ₦1,200,000 X 92 = ₦110,400,000

Therefore, Judas Iscariot’s property has a current market value of = ₦110,400,000

Frequently Asked Questions
What Is Commercial Real Estate Valuation?
Commercial real estate valuation is the process of determining the value of a commercial property, such as an office building, shopping centre, or apartment complex.

What Are The Commercial Real Estate Valuation Methods You Know?
There are several methods used to determine the value of commercial real estate, including the income approach, the cost approach, and the market approach.

What Are Real Estate Valuation Models?
Real estate valuation models and real estate valuation methods are the same nomenclatures. You can use them interchangeably.

What Is Real Estate Valuation Cap Rate?
One important metric used in real estate valuation is the capitalization rate, or “cap rate” for short. For example, if a property has a net operating income of $100,000 and a purchase price of $1,000,000, the cap rate would be 10%. This means that an investor can expect to earn a 10% return on their investment in the property.

Cap rate is an important metric in real estate valuation because it provides a quick and easy way to compare properties of different sizes and in different locations. By comparing cap rates, investors can determine which properties are likely to provide the best returns on their investment.

What Is A Real Estate Valuation Calculator?
A real estate valuation calculator is a tool that uses mathematical algorithms to determine the value of a piece of property. It typically takes into account a variety of factors, such as the location, size, and condition of the property, as well as local market conditions and trends. By inputting this information into the calculator, you can get an estimate of the property value.

Concluding Remark
Only an unserious investor does not care about knowing the worth of their assets. The end result of such an error is drastic or crazy.

Knowing your property value is the only way to make informed decisions about such a property. Thus, every real estate investor needs basic knowledge of real estate valuation.