Imagine you are selling your house. How do you set a price?
Or let’s say you are buying a house. How do you know you’re buying it at the right price?
That’s where building valuation comes into play.
Here, we will cover the purpose, methods, calculation and factors of building valuation.
So, let’s dive in.
Methods of Building Valuation
- Rental Method of Valuation
In this method, the valuation is based on the rental income the building can generate.
The annual rent is capitalized at a rate deemed appropriate for that type of building to arrive at its capital value.
- Direct Comparison With Capital Value
As the name suggests, this method involves comparing the building with recently sold similar buildings.
We use their sale prices as a benchmark to estimate the value of the building after making adjustments for any differences.
- Valuation Based on Profit
This valuation estimates the building value by determining the profits attributable to the building and capitalizing it at an appropriate rate to arrive at the capital value.
The profit considered could be net or gross income.
- Valuation Based on Cost
This method determines the cost to construct an identical or similar building at current prices.
Depreciation is deducted from this cost to arrive at the depreciated replacement cost, which is the estimated building value.
- Development Method of Valuation
Here, the valuation of the building is based on the concept of the highest and best use of the land on which it stands.
What new building could maximize the land’s potential is assessed and its construction cost forms the value.
- Depreciation Method of Valuation
This method determines the current cost of constructing the building and estimates the total life of the building as well as its effective age.
Based on this, depreciation is deducted to arrive at the depreciated value of the building.
Purpose of Building Valuation
Sales and Purchases
As a seller, it helps you set reasonable prices for the building. And, as a buyer, it assists you in making informed offers.
Financing and Refinancing
If you are a lender, valuation helps you to determine the loan amount you can offer.
Property taxes are often based on the assessed value of a building.
Building valuation helps insurance companies to ensure proper coverage.
As an investor, building valuation helps you to predict future profitability.
Valuations can be critical in legal matters such as divorce settlements, estate settlements, or disputes between property owners.
Calculation of Building Valuation
To calculate the value of a building, you must first choose the appropriate method.
Then, gather all necessary data, such as recent sale prices, rental income, or replacement costs.
After applying the chosen method, make adjustments for any unique features or circumstances that could affect the property’s value.
How Depreciation Is Determined?
Depreciation accounts for the loss in value of a building over time due to wear and tear, obsolescence, or other factors.
There are different methods to calculate depreciation:
- Straight-Line Depreciation: This method spreads the cost of the asset evenly over its useful life.
- Reducing Balance Method: Here, the depreciation expense decreases over time, taking a larger percentage in the early years of the asset’s life.
- Sum-of-the-Years’ Digits Method: An accelerated depreciation method that multiplies the depreciable cost by a series of fractions based on the sum of the asset’s useful life digits.
Key Factors in Building Valuation
- Location: Proximity to amenities, quality of the local school district, crime rates, and economic stability are all important.
- Condition: The overall state of repair and any recent improvements can significantly affect value.
- Market Trends: Real estate markets fluctuate, and current trends can impact valuation.
- Size and Layout: Larger buildings typically have higher values, but layout efficiency also plays a role.
- Age and Architectural Style: These can contribute to a building’s desirability and thus, its value.
Zoning laws, interest rates, and the overall economic climate can also influence building valuation.
Long story short, building valuation is a complex process influenced by numerous variables.
Whether you’re a property owner, buyer, investor, or working in finance, understanding these factors and the methods used to determine property value is essential for making sound decisions in the real estate market.
We hope that the information we have provided has helped you uplift your knowledge regarding building valuation.