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Property Valuation Methods

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What are the things property valuers look at when valuing your property? 

Real estate appraisal, property valuation or land valuation is the process of developing an opinion of value (usually market value) for real property. Real estate transactions often require appraisals because they occur infrequently and every property is unique — especially their location, a key factor in valuation, unlike corporate stocks, which are traded daily and are identical. Appraisal reports form the basis for mortgage loans, settling estates and divorces, taxation, and so on. Sometimes an appraisal report is used to establish a sale price for a property.

But in the form of layman language, how does valuer actually value your property? Is it really subjective? Property Insight discusses the topic with a few key opinion leaders in the industry.

HOW DO YOU VALUATE?

The director of Laurelcap Sdn Bhd, Stanley Toh says he looks at property valuation from an economist point of view, rather than science or art. “The main factor that would define the value of a property is the demand and supply. Therefore, we must look at what are the factors that drive the demand and supply. Valuers do not determine the market but we just report the number, the best estimation we can find. There is of course a general rule of thumb that we have to follow in valuation.”

On the other hand, the managing director of VPC Alliance (Malaysia) Sdn Bhd, James Wong says “The common methods of valuation are the Comparison Method, the Income Method and Cost Method. Valuer will inspect the subject property and will take note of the property details during inspection such as building condition, structure, structural faults, rooms and layout, fit outs, fixture and fittings, any improvements, measuring the floor area (if required), etc.”

According to Wong, there are a lot of factors to take into consideration, such as:

  • Location and accessibility, surrounding developments and infrastructure availability
  • Type of renovation particularly for extended portion of the house, does the owner obtain any approval from the Local Authority.
  • Tenure of either leasehold (remaining period of how long) or freehold
  • Current occupancy rate
  • Land area and floor area
  • Building conditions and finishes
  • Monthly rental
  • Planning approval, planning restrictions, zoning, density or plot ratio and title land use for development land valuation.
  • Land terrain for development land valuation
  • Caveats or encumbrances over the property

“After considering the characteristics of the property stated above and latest transactions, the valuer will then assess and determine market value,” Wong adds.

The master trainer from PropertyMethod.com as well as an avid property investor, Dr. Ong Kian Leong defines property value as (market value) + (added value) – (discounted value). What does this exactly mean?

Toh defines market value in general as “The estimated amount for which an asset or liability should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”

Ong describes renovation and extension as the functional fixtures, for example, built-in kitchen cabinet, built-in wardrobe, flooring, additional wall/door for study room, etc.; functional extension, patio, terrace, car porch, additional bedroom/kitchen/bathroom, etc. Damage, risk, alteration is the structural damage to the property (roof, foundation, wall, etc.) such as knocking down of door, wall, room, etc. 

DISPARITY IN PROPERTY VALUATION

Variation in all the factors mentioned above is particularly the delay effect in data gathering process to update capitalisation rate, states Ong.

Some owners do not understand why there is such a different value between two identical units. Toh explains, “For example, owners think that if they put RM500,000 in their RM1 million property, so they should have a property priced at RM1.5 million. But from an agency’s point of view, if they get a buyer that needs to choose between a RM1.5 million and RM1 million that is not yet renovated, the buyer would probably go for the RM1 million property because he can do the renovation himself. The buyer probably would not pay for RM1.5 million. We can’t put the cost into the value. Value is what’s reflected in the demand and supply, and the price that buyer is willing to pay, rather than what is your cost. You can build KLCC in the middle of jungle somewhere but no one will buy it, so there’s actually no value in it.”

“There is also factor called the non-qualitative effect. Let’s say I have two identical units – One unit I rent to the bank, one unit I rent to hardware shop – a single proprietor, chances are if I want to sell the unit at the same price, which will be taken up faster? It’s the bank unit cause the tenant profile is stronger. In that sense there is a sense of premier which will be instilled to the property value,” Toh adds.

Wong says, “Valuation is both an art and science, which is why a valuation by a qualified valuer is based on his experience, value judgement and knowledge of property values and market in the locality. Property valuation are normally reflective of the market value of the property in the locality. Valuers are professionally qualified and required certain years of post-qualifying experience, before they can become Registered Valuers. Hence, valuers will normally be able to provide a fairly accurate assessment of the market value of the property.”

ADDING VALUE TO YOUR PROPERTY

From Ong’s point of view, an investor can add value to the property by increasing the quality of being rentable (potential annual income), increase added value (renovation, extension, and other fixed items), and reduce discounted value.

Toh elaborates, to add value of the property, one must go back to the basic – increase whatever factors that people like in order to increase the demand of the property. “For example, a well-maintained condominium unit would be a better place to stay, so if there are two same units of condominium, but the one well-maintained will fetch a higher value.”

“Other factor is the change of used to a better return. For example, a corner or semi-d factory turns into a showroom, naturally it has commercial value rather than just a normal industrial unit. Use of land also plays a big role, for example changing from residential to commercial land,” says Toh. 

CONCLUSION

For financing of their housing loan, buyers going to the bank for a loan will invariably want a higher value so that they can get the maximum loan. Hence, valuers play a role to advise the bank on the actual market value of the property.

Property valuers are the custodian of the property wealth of the country. Banks are guided by property valuation before they approve a loan to the customer. Corporate buyers seek the opinion of valuers on the value of the property before they buy the property. For public listing and other corporate exercises, valuers are sought to provide an independent advice on the value of the property to protect the interest of minority shareholders.

Valuation is also important to secure the maximum loan available, to maximise selling price of property, to shorten waiting time to sell property.

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