Tag Archives: property valuation

What is The True Property Value?

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

Valuation of commercial property: best methods

Commercial property differs from residential in many respects. It includes offices, factories, warehouses, shops and more. In recent years it has grown to include more affordable and manageable options such as student accommodation, hotel rooms and storage units etc.

You can’t get a residential buy-to-let mortgage to buy commercial property. If you are an investor in commercial property then you most probably either invest with cash, or have some form of commercial finance backing. As an example, I own an office building which is financed using a commercial loan from a mainstream bank. What is the main difference between residential and commercial property from a valuation perspective? It is the certainty of the future income stream. Most commercial property is either let on a long lease, or has a high degree of confidence in the occupancy as with student accommodation or hotel rooms.

Fluctuations in the local residential market will not have a direct impact on a commercial property valuation; and values are not negotiable and/or variable as per the residential market.

So how is commercial value established?
Commercial valuers typically choose to value based on gross rental yield. Why gross as opposed to net? Because unlike typical buy-to-let property which comes with expenses such as ground rent, service charges, insurance etc, the gross and net yields of typical commercial property are often very close.

Typically, commercial property is let on a full repairing and insuring lease (FRI) or an internal repairing lease (IRL). These mean the person or company renting the commercial property will be responsible for internal and external repairs and insurances; or, in the case of an IRL, everything from the windows inwards (as per shops in shopping centres, for example). Therefore the only investor expense (other than factoring in loan repayments, if relevant) for commercial would be a management fee, thus keeping gross and net yields close.

And, most importantly, if a lot of distressed property has been sold below market valuein the immediate area, it gets increasingly difficult for the surveyor to separate the true market value from a forced sale market value. In reality, the true market value is going to start falling if there is a concentration of below market value property sales in that area. This is an illustration of how your clever purchase of a distressed property can materially impact the values of property in that area for future vendors!