Want to Know the value of a Property?

How do you make sure that when selling or buying a property you are getting a good deal? – First, know the value of a property. In this article, We will educate you on how to get to know the value of a property you are either buying, selling, or even renting

Well determining the value of a house or property is not so easy. It is a complex process that depends on many factors like the current market environment and who you ask. You will be surprised that a banker, customer, seller, builder, lender, realtor agent or a tax assessor will all assign a different value to the same property.

5 Reasons Why Knowing The Value of Property Matter

View of a House throgh a lens

Choose the home with the correct lens

  1. Net Worth. The value of a home is closely associated with your net worth or overall financial health.
  2. Selling your property? If selling a property or home find out its value as this will ensure you get top value and a good deal. 
  3. Looking to Borrow? For home improvement, starting a business, etc. In this case, you could borrow from the equity in your property. Your property value can be very key in determining how much equity you can tap or borrow from the home by refinancing or a business loan
  4. Taxes. The Government and municipal authorities use a property value to determine many types of taxes that include stamp duty, property transfer taxes, and property taxes. Knowing the right value can help you determine, negotiate, and make sure you are paying the right property taxes.
  5. Insurance. Many types of insurance may be put on a property and they include Fire and Safety, Property and Chattels Insurance among others. Insurance premiums will depend on the value of the property.

A home is a place that is very dear to us and the largest saving for most families. Estimating the value of a property is necessary for a variety of endeavors, including financing, sales listing, investment analysis, property insurance, and taxation. But for most people, determining the asking or purchase price of a piece of real property is the most useful application of real estate valuation. Here is why it is important to know the valuing a home you are buying or selling:

What is the “Value of Property”?

The value of a property may be defined as the present worth of the future benefits arising from the ownership of a property. Unlike other consumer goods with benefits that are quickly used up; the benefits of real property are generally realized over a long period of time. Furthermore, the estimate of a property’s value always must take into consideration economic and social trends, as well as governmental controls or regulations and environmental conditions that may influence the four elements of value: For example in Kenya all of the Government infrastructure projects like Thika Highway resulted in up to a four-fold increase in the value of some of the properties around the Thika highway corridor.

  • Demand: the desire or need for ownership supported by the financial means to satisfy the desire
  • Utility: the ability to satisfy future owners’ desires and needs
  • Scarcity: the finite supply of competing properties
  • Transferability: the ease with which ownership rights are transferred

I conduct many property valuations and I look at DEMAND, UTILITY, SCARCITY, and TRANSFERABILITY as key pillars to a property value and in the case of an income property, I would take the Net Operating Income and divide by the Cap Rate. In Kenya the property valuation is greatly influenced by two other issues that include the “approved user” status and locality, The approved USER status of any property could be being either commercial, residential, industrial, and agricultural. The USER status has a considerable effect on the marketability and commercial viability of a location and consequently value. Location and the access of a site to infrastructures like road, rail, or Sea accessibility is also a primary driver to the demand and marketability of a site and consequently the perceived value of a piece of real estate property. A very good example has been the transformation to property values that has been catalyzed by the most recent government infrastructural projects like Thika Highway and the Northern and Western BI-passes in Nairobi “

S. N. GICHU, County Surveyot Malindi Kenya

Start the process to Know the value of a home you want to buy, sell, or borrow. Order an Home Evaluation 

Generally, the following are the most common ways used to determine the value of your property.

  1. Online Valuation Tools also called AVM’s Order an AVM
  2. Comparative Market Assessment. Order a CMA
  3. Full Property Appraisal
  4. Income Computation Method (For Income Properties) 
  5. Evaluate comparable properties

Method 1 Use online Automated Valuation Tools (AVM)

You may find an approximate value of a home using available and useful home value estimators. In fact, the technical term used in these tools is an automated valuation model or AVM, which is typically offered by lenders and they use of aggregated data to predict the value of a home on the basis of recent sales and listing prices in an area. 
The AVMs used by lenders and real estate professionals are different. These tools use a “confidence score” to indicate how close the AVM provider thinks an estimate is to market value. A confidence score of 90% means the estimate is within 10% of market value, for example, though each AVM has its own way of calculating confidence.In Kenya, our market data is not very easily available and as such AVM models are proprietary and used by the big real estate firms

Method 2- Using A Comparative Market Analysis (CMA)

When you’re ready to dive deeper into your home value, you can request a real estate firm like Myliberty homes to conduct comparative market analysis or CMA. Although not as detailed as a full property appraisal or valuation, a CMA will provide an estimate of your property value to be used as a guide to either buy, sell, or borrow from the property. 

At  Myliberty homes, we can conduct a CMA today. Order a CMA

Method 3- Full Property Appraisal (FPA)

As a property owner or buyer, you can hire a property appraiser to help you determine the value of a home. A property appraisal varies by the need of a client and valuation could be based on current value, historical value, forced sale value, etc. An appraiser will evaluate the home on the basis of following points:

  • The cost of land acquisition, building the house and/or home improvements, etc
  • Fair market value based on the location of the property.
  • Comparable properties based on the listing, cost, depreciation, and other factors.

This information gathered is combined to create a final opinion of the value for the home and delivered in an official report This report among another will list 

  1. Fair market value – approximate sale price 
  2. Force Sale Value – if the property was to be auctioned

Method 4: Income Capitalization Approach (INCA For Real Estate Properties)

Often called simply the income approach, this method is based on the relationship between the rate of return an investor requires and the net income that a property produces. It is used to estimate the value of income-producing properties such as apartment complexes, office buildings, and shopping centers. Appraisals using the income capitalization approach can be fairly straightforward when the subject property can be expected to generate future income, and when its expenses are predictable and steady. (Order an INCA)

Direct Capitalization

Appraisers will perform the following steps when using the direct capitalization approach:

Gross Income Multipliers

The gross income multiplier (GIM) method can be used to appraise other properties that are typically not purchased as income properties but that could be rented, such as one- and two-family homes. The GRM method relates the sales price of a property to its expected rental income. (For related reading, see “4 Ways to Value a Real Estate Rental Property“)

For residential properties, the gross monthly income is typically used; for commercial and industrial properties, the gross annual income would be used. The gross income multiplier method can be calculated as follows:

Sales Price ÷ Rental Income = Gross Income Multiplier

Recent sales and rental data from at least three similar properties can be used to establish an accurate GIM. The GIM can then be applied to the estimated fair market rental of the subject property to determine its market value, which can be calculated as follows:

Rental Income x GIM = Estimated Market Value 

What’s next?