Real Estate Valuation

Key Points

- Valuing real estate is difficult since each property has unique features such as location, view, total sqm, floor plan layout, and amenities.

- Typical real estate market concepts like supply and demand will certainly contribute to a property's over-all value.

- Individual properties owned by landlords, however, must be subject to appraisal, using one of several methods, to ascertain a fair value.

Basic Valuation Concepts

A property's value is defined as the present worth of future benefits arising from the ownership of the property. An estimate of a property's value 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:

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

Value vs. Cost and Price

The cost of the property refers to actual expenditures. For example, materials, labor renovations etc... Price, on the other hand, is the amount that someone pays for something. While cost and price can affect value, they do not determine value. The sales price of a house might be QAR 1,500,000, however the value could be significantly higher or lower. For instance, if a new owner finds a serious defect in the property, then the value of the house could be lower than the price.

Market Value

An appraisal is an opinion or estimate regarding the value of a particular property as of a specific date. Appraisal reports are used by businesses, individuals, investors, banks when making decisions regarding real estate transactions. The goal of an appraisal is to determine a property's current market value – the most probable price that the property will bring in a competitive and open market.

Appraisal Methods

An accurate appraisal depends on the methodical collection of data. Specific data, covering details regarding the particular property, and general data, pertaining to the country, region, city, and neighborhood wherein the property is located, are collected and analyzed to arrive at a value. Appraisals use three basic approaches to determine a property's value.

The most favoured approach is the Sales Comparison Approach

This approach is commonly used in valuing properties owned by individuals and it is an estimate of value derived by comparing a property with recently sold properties with similar characteristics. These similar properties are referred to as comparables, and in order to provide a valid comparison, each must:

- Be as similar to the subject property as possible

- Have been sold within the last year in an open, competitive market

- Have been sold under typical market conditions

At least three or four comparables should be used in the appraisal process. The most important factors to consider when selecting comparables are the size, comparable features and – perhaps most of all – location and views, which can have a tremendous effect on a property's market value.

Comparables' Qualities

Since no two properties are exactly alike, adjustments to the comparables' sales prices will be made to account for dissimilar features and other factors that would affect value, including:

- Age and condition of buildings

- Date of sale, if economic changes occur between the date of sale of a comparable and the date of the appraisal

- Terms and conditions of sale, such as if a property's seller was under duress or if a property was sold between relatives (at a discounted price)

- Location, since similar properties might differ in price from neighborhood to neighborhood

- Physical features, including lot size, landscaping, type and quality of construction, number and type of rooms, square feet of living space, hardwood floors, a garage, kitchen upgrades, a fireplace, a pool, central air, etc.

The market value estimate of the subject property will fall within the range formed by the adjusted sales prices of the comparables. Since some of the adjustments made to the sales prices of the comparables will be more subjective than others, weighted consideration is typically given to those comparables that have the least amount of adjustment.