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The importance of property valuation

On Behalf of | Dec 4, 2023 | REAL ESTATE LAW - Real Estate Transactions |

Part of any real estate transaction in the Bay Area involves valuing the property to be bought and sold. The purpose of property valuation is to give the seller an idea of what price they should sell the property for.

A valuation is also necessary for a mortgage company to determine how much to lend to a borrower. Additionally, it gives the borrower a sense of how much they should expect to pay in taxes.

There are several different types of property valuations that can be done and various factors that determine the ultimate valuation.

Property valuation methods

Three common types of property valuation methods are the cost approach, the income approach and the sales comparison approach.

The cost approach is based on the property’s replacement cost. If the property was destroyed, how much would it cost to replace it? That number is then subtracted by any depreciation cost and added to the property site’s value.

The income approach is usually the best approach to use for investment properties that are rented out. The value is decided after examining the property’s rental values, expense statements and vacancies, along with several other factors.

The sales comparison approach is the most used approach when valuing a property. This approach involves a realtor examining other similar properties in the area and basing the property’s value on those.

Similar properties generally mean properties of the same size and with the same number of rooms or features. The exact valuation may change depending on the overall condition of the property compared to others.

Factors in a property valuation

Some factors that go into a property valuation include the property’s internal and external characteristics, its size and the location. Smaller details, such as the outside landscaping or smart home features, can still influence a property’s value.

The neighborhood the property is in can affect a property valuation. A property closer to parks, schools or shopping areas might be assessed a higher property value. Additionally, the current real estate market often impacts the ultimate value of a property.