It is imperative that you carry property insurance for your home and/or business. To make sure that your insurance is based on the correct property value you need a new valuation ever two to three years. Make sure that your insurance is not based on an over-valued property (in which case you are paying too much in premiums) nor an under-valued property (in which case your insurance will never cover your total claim).
There are three Internationally recognized valuation methodologies for property appraisal. Each method dedicated to the real estate specific use. All three approaches vary in effectiveness for specific assignments. Although all three approaches may give reliable indications of value, frequently one or two may be totally inappropriate. In arriving at an estimate of value of a subject property, all of the methods, listed below, will be considered and one or more of them utilized.
1. Direct Market Comparison:
“A method that provides an indication of value by comparing the subject asset with identical and/or similar assets for which price information is available”.
The Market Approach measures the value of your home by comparing recent sales of similar or substitute property and its related market data. This 'similar transactions' method uses valuation data based on historical transactions that have occurred (past sales). This data is then mathematically adjusted and applied to your home's physical data to arrive at a computed fair market value.
This Approach is very popular in many assignments as it is reflective of the interplay of buyers and sellers in the open market. In order for this approach to be reliable however, it is necessary for there to be a significant number of sales of properties similar to the one for which the assignment is being carried out.
2. The Income Method:
“The method that provides an indication of value by converting future cash flows to a single current capital value”.
The Income Capitalization Approach is based on the principle that the value of a property is indicated by the net return to the property, or what is also known as the present worth of future benefits. The Income Capitalization Approach considers a property’s potential cash flow and analyzes the present worth of the anticipated future benefits to the owner over an assumed holding period.
The Income Approach is of considerable importance in appraising commercial properties. Most purchasers of this type of property are generally concerned primarily with an income stream, which is what this approach relies on. The disadvantage of this approach is that it is sometimes based on projections of the future.
3. The Cost Method:
“The method that provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or construction”.
The Cost Method is based on the principle of substitution and is valuable in distinctive properties for which there are either very few or no sales of similar properties. Its drawbacks are that it does not sufficiently rely on market preferences, and in cases of older properties, the quantum of depreciation to be charged is not easily identified. This valuation follows the following steps:
a) Determine the value of the site as if vacant;
b) Calculate the replacement cost new of the improvements;
c) Estimate the depreciation from all causes (physical, functional and external);
d) Add the site value to the depreciated value of the improvements.