Valuation Methods

There are a number of methods of valuing property, each of which has its advantages
and disadvantages. Often, the method changes depending on whether you are building,
buying or selling the property in question and despite common misperceptions,
valuations of a property can alter significantly depending on the valuation method used.
However, before using any methods to value a property, there is a common means of
valuation in Ireland which is known as the Open Market Value. This is not actually a
valuation at all but is usually an educated opinion of a propertys value if it were to be
sold on the open market on a given date with reasonable time and conditions to do so.
As such, the Open Market Value is not a mathematical calculation of a propertys
inherent value using a methodological approach, rather an educated opinion based on
assumed
market
conditions.
Whilst there are many methods of valuation, we will only cover the most popular
methods here. These can be summarised as follows:
Comparable Method
Repayment Method
Investment Method
Residual Method
Cost Method
The comparative method of valuation relies exactly on that - comparison. It involves
comparing similar types of houses in a given area to judge the relative value of any
particular one. This is the method most often used to achieve the Open Market Value. In
order for this to be truly effective in Ireland, it is necessary to know the actual sales
prices of the properties, rather than the more commonly published asking prices,
however an approximate valuation can still be achieved using the latter.
Another point to make when using the comparative method is that sometimes the prices
achieved for a property may not actually represent its actual value. For example a
forced or pressurised sale in which a property is sold quickly can often undervalue a
given property while similarly, a property owner who requires some of an adjoining field
in order to build their dream extension may be prepared to pay a higher price thus
overvaluing the property. This should be borne in mind when utilising sales prices as
comparisons, as on some occasions, the prices may be higher or lower than what the
actual value of a property may be.

Another method of valuation is the repayment option, which aims to repay the price of
a property within 12-15 years, based on its income. Therefore taking a property which
has a rental income of 600 per month, the value of the property would be calculated as
108,000
based
on
this
method.
This
is
arrived
at
by:

Monthly
Yearly

rent
rent

(600)
X

X
15

12

months
years

7,200
108,000

Of course, this analysis can be further modified by taking into account taxes due,
vacancy periods, repair costs or rental and capital increases over the time span
involved. If an investor were to sell the property at the end of a twenty year investment
term, gross profit would be the rent over the last five years plus any capital appreciation
which occurred over the entire twenty year term.

An investment valuation is calculated using the yield from the property. Using the
above example, a property on the market has an asking price of 200,000 and a rental
income
of
600
per
month
The

yield

of

the

property

is

therefore (600

12)

100 = 3.6%
200,000

The higher the yield means the greater the return on your investment and using an
investment valuation is useful in comparing the returns on a property to other
investments such as equity, stocks, bonds or even interest deposit accounts.

Another common method of valuation is the residual value, which in terms of property
development, calculates the value somebody may be prepared to pay for a plot of
development land for example. The residual value is often useful in calculating whether
a
profit
can
be
achieved
on
a
development.
At

its

most

basic,

the

residual

value

formula

can

be

given

as

follows:

Value of completed project less total development costs = value of the property in its
present
condition.
To gain a more accurate residual value however, it would be necessary to include
expected appreciation or depreciation in price of the development once complete less
total development costs such as financing and interest costs, taxes and even the
developer's profit margin which would allow for the true residual value of a site to be
obtained.
Therefore using a crude example, if the estimated sales price for a newly built property
is 250,000 and the building costs amount to 150,000, the residual value of the site
can
be
calculated
at
100,000.
If you were a property developer and you bid above the Residual Value of the site at say

125,000, you would automatically be running at a loss of 25,000 based on the above
method.

The cost method or 'Base Value' of a property is the simple cost of the site it is built on
and the cost of building the property itself. Included in the cost of building are items
such as labour, fit out and any taxes due. The base cost is often a good starting point
for
valuations
required
for
insurance,
scheduling
or
budgeting.
The reinstatement cost used for insurance purposes are an extension of the base value,
allowing for demolition and site clearance fees also. In the reinstatement cost however,
the price of the land is not included.