Blog: How to value a property
Few questions are more important to a landlord than “How do I accurately value a property?” Here, Michael Dent founder of PropertyData looks at what you can do to make sure you are doing it right.
Maximising your rental yield and capital growth starts with having confidence that you're not paying over the odds. And when you come to sell a property, you need to know what it's worth.
There are a few different valuation methods, but all of them try to access the same truth – how much the property would sell for on the open market.
Because different approaches to valuation might produce different results, it's often best to obtain multiple valuations to help you determine the true value of a property.
In this post I'll run through the factors that influence a valuation, different methods of valuation, and the types of companies that offer valuations.
What factors influence a valuation?
The single most important factor of a valuation is location. Everyone knows that a 'cosy' one bedroom flat in central London might sell for as much as a four-bedroom house in Bradford.
This effect is driven by supply and demand, and a desire to be near jobs, schools, shops, transport and other facilities.
Beyond location, the factors that a valuation will consider are the size of a property (number of rooms and square footage), as well as its age and internal condition and finish quality. Outside space such as a garden and off-street parking are important too.
A perfect valuation would also consider some of those property 'X-factors' that are harder to quantify, but which we all know are important: the layout or 'flow' of rooms, design quality, and kerb appeal.
The 4 main ways of valuing a property
1. Comparative Method
The most commonly used method, this involves finding recently completed sales of similar properties nearby – properties with the same number of bedrooms or a similar square footage.
Adjusting for any differences, each data point helps you reach a valuation. This method works particularly well in areas where there are lots of similar properties, for example neighbourhoods with streets of Victorian semi- detached or terraced housing.
2. Income Method
The income method looks at a property's ability to generate income.
A property's monthly or annual rental income can be estimated by evaluating the rental value of nearby similar properties. Working backwards based on the expected yield for the area, you can derive a sale valuation for the property. In the residential market, this method is used most often for Houses in Multiple Occupation (HMO) properties where rooms are let individually.
3. Residual Method
The residual method is often used to establish the valuation of a potential development site. It uses the cost of developing the land and final gross development value to determine the value for the land.
4. Contractor's method
Normally used for commercial properties or with an unusual property without comparables, this method calculates land value plus how much it would cost to rebuild the property from scratch, and then adjusts for the property's age and condition.
Who carries out property valuations?
Estate agents
An easy way to get a valuation for a property you own is to ask an estate agent. Keep in mind that because they’ll want to win your business, the valuation is likely to be on the high side. My advice if you go down this route is to get two or three opinions, calculate an average and then deduct a few percent to reach your final valuation.
Mortgage providers
A mortgage lender will value a property for the purpose of lending against it. They'll probably charge a valuation fee for the privilege, though, and the valuation will be conservative (they hate risk!). Often they'll simply take the most recent purchase price.
Chartered surveyors
The 'gold standard' of valuation is one carried out by a RICS-approved chartered property surveyor. Widely recognised by mortgage lenders, this type of valuation takes into consideration current market conditions as well as a number of different factors.
Independent automated valuation from PropertyData
You can use PropertyData to generate a valuation for any house, flat or HMO in any urban or suburban area in England or Wales. All you need to input is some simple facts about a property (for example the postcode, internal area and finish condition), and our Automated Valuation Model will return an instant and accurate valuation.
Our valuations combine both the comparative method, using our extensive transaction £/sqft and asking price data, as well as the income method using our comprehensive rental data. And because we are neutral and independent, you can trust that the valuation is too.
In summary
There are many ways to value a property, and many companies who can help you do so. Choose carefully, and consider getting more than one valuation to help you come to your final conclusion. Nothing beats a RICS-approved surveyor's valuation, but an accurate online valuation tool is a great place to start.
- PropertyData is a website that helps landlords to use data and analytics to make better decisions when investing in residential property. Monthly subscriptions start at £14/month.
