Since house prices are a much discussed topic, it is useful to be able to establish how both professional and lay person alike can attribute reasonable valuations to a property.
This article examines house prices from the perspective of the buyer and the different methods of personal and professional valuations available, as well as giving an overview of different methods used by buyers to assess whether the asking price is a true reflection of the value. However, we must first define ‘property value’.
Value is not an objective term, but a subjective one based on how highly a person rates the commodity in question. In the case of house prices in the free market, value covers two important perspectives – how the seller values the property, and how a buyer values it.
Commenting on the property market, the US Appraisal Foundation defines market value as: “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.”
In the housing market, the forces influencing the value of a property cover a range of tangible and intangible factors, include its physical and environmental characteristics, social standards, economic influences and political or government regulations. Because different people value features differently (one person may see having a garden and a nearby children’s play area as a disadvantage, where many would see it as a significant benefit of the property), there could be a substantial gap between subjective valuations and the fluctuations of the free market. Thus, the value that a particular buyer places on a property will not always correspond to its market price. Therefore, every property valuation can only ever be a guideline to what the house will eventually change hands for, and we must remember that the idea of asking price and actual price are rarely the same thing.
Independent property valuations are traditionally performed by chartered surveyors often on behalf of lenders who look for a professional opinion on a property’s worth so that they can lend against this valuation. It is a common misconception that Estate Agents value properties. Estate Agents simply guide vendors to a suggested asking price – they cannot be relied upon to provide objective and accurate valuations. Vendors who do not acknowledge the incentives which estate agents face (i.e. it is more profitable to turn over properties quickly than to achieve the highest asking price for a vendor) are being unrealistic.
It is perfectly possible for non-professionals to do their own valuations. Unfortunately, a thorough understanding of valuation theory and methodology is not commonplace. There has been little comprehensive literature available as to what constitutes value and what the different methods of determining the worth of a property are. The following will provide some insight into theoretical approaches to value and valuation methodology.
There are several main theoretical approaches to determining the value of a house, namely the “Comparable Sales Method” and the “Income Approach”. There will also be a brief explanation of a relatively new, method of Automated Valuations and the fourth method of the “Cost Approach” will be discussed briefly, but since this is not an autonomous approach, the emphasis will be put on the first three methods. House Price Valuation Methods
There is no perfect method of assessing the value of a property. However, the methods outlined above provide useful guidelines to both buyers and sellers on how to estimate the approximate worth of a house. This helps sellers decide where to set the price for their property, whilst providing buyers with means of evaluating where a house is located in the market and whether it is worth the investment. Many property market participants will find that a combination of all the approaches will help them make the most informed decisions.