Since ReMax Colonial deals exclusively with investment property, usually offering below market value opportunities, the issue of the ‘true’ property value is paramount. The market value is the benchmark and starting point for any sensible discussion of value.
But what is true market value and how do you establish it?
Firstly we need to understand the key distinction between residential and commercial property and how they are valued. If you are used to investing in traditional buy-to-let property then you may wonder why I even mention commercial investments. The world is no longer so black and white and understanding the different methods of valuation is critical for a full understanding of property. In recent years, the emergence of student accommodation, hotel rooms and storage units are three examples of property which buy-to-let investors can be offered, but which are valued very differently. So how is property valued? And how can you be reasonably certain that the value is correct?
Two types of valuation
There is a critical distinction to make between an ‘open market valuation’ and a ‘forced sale valuation’. The definition of an open market valuation is: ‘a sale between a willing buyer and a willing seller, allowing enough time for marketing.’ The definition of a forced sale valuation is: ‘a sale between a willing buyer an unwilling seller, not allowing sufficient time for marketing.’
These distinctions are important. The different valuations can be as much as 50% apart! At Select Realty Online we get involved with both valuations. We start with an open market valuation, then see what kind of discount we can force from an unwilling seller to provide our clients with property purchased at a ‘forced sale’ price.
The challenge is this – if enough property is sold in a local area at a forced sale price, it can negatively impact the open market value. Then getting to the true value can get difficult. As an investor you need complete clarity about whether you are talking about an open market or forced sale valuation.
Valuation of residential property
Here’s how residential property is valued. The following things are taken into account:
• Comparable sales recently achieved
• Current property listings
• Recent valuations that didn’t result in a sale
• Other factors which are impacting the area
• Adjustments for size, quality, location, time, age and more.
The valuation can be done in three main ways:
• Informally by a property agent
• Formally by a member of Royal Institute of Certified Surveyors (RICS)
• By an automated valuation system like Hometrack or Calnea