How To Calculate The Market Value Of A Property

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John Brady

John Brady

John is a property writer here at RWinvest. With a close eye on property market news and updates, John writes detailed and informative articles on a range of topics that are helpful for anybody looking to invest in UK property.

When looking to buy or sell a property, figuring out how much it is worth is one of the first steps in the process. However, this can also be one of the most confusing.

Calculating the value of a property can be a difficult process, with multiple methods being used depending on the type of property.

Different valuators may come up with a wide range of values for the same property, and it can be challenging to find the right value.

Speaking to a local estate agent to get a professional valuation of your property is best, but sometimes their estimation could be different from other opinions you have heard. Doing your own research can also help calculate the market value to ensure you see a healthy profit.

Financial advisors look at several different aspects when calculating the market value of a property. This guide will explain some of them, to help you get a better understanding of how to calculate the market value of a property.

What Is Market Value?

The term market value refers to the professional opinion of what a property would sell for at arm’s length. That means being sold to an independent buyer, with no kickbacks or concessions.

This is based on factors like the local property market and supply and demand in the area, as well as specific property features like the number of bedrooms or the size of the property.

This is different from the market price, which is what the owner chooses to sell the property for. These terms are not interchangeable, despite some instances where the market price is the same as the market value.

Generally, you use the market value of a property to work out the asking price when selling. Having an asking price higher than the market value gives you room to negotiate with potential buyers.

Having a market price the same as or above the market value is good as it means making more profit, whereas selling for lower than market value is not recommended.

Methods of Calculating the Market Value Of A Property

There are several different methods of calculating the market value of a property. This process is known as valuation, and you can do your own valuation as a property owner by conducting research into several key areas:

1. Look at National and Local Housing Market Trends

Seeing what trends are currently affecting the UK housing market both on a national and local scale is an important aspect of evaluating a property’s market value.

The Land Registry tracks the national housing market through the UK House Price Index, which can inform you of any trends the UK housing market is experiencing.

This collects the data of all sold properties recorded when the change in ownership is logged. The amount of data makes it the most accurate price index in the UK.

This data can take a while to publish, so sometimes is out of date by the time it is released. It is the most accurate price index to use when evaluating market value in the UK.

Halifax, the largest mortgage provider in the UK, also provides a monthly house price index.

Their data is faster but only samples their own mortgage transactions, averaging a size of around 15,000 per month. This makes their findings more up-to-date than the Land Registry but less accurate.

For a more local level, using sites like Zoopla to see the prices of properties sold in your area makes this research more effortless than ever. They even have a property price calculator which gives you a rough valuation on their website.

Collecting this information can help you understand if house prices are rising or falling, as well as what demand there is in your area. This information can help you when calculating the market value.

2. Look at Similar Properties to Yours That Have Sold

When researching what properties have sold in your area, try to find properties with similar features to yours that have sold.

Look for aspects like the number of rooms, the square feet of each room, the location of the property, and what kind of property it is.

This can help when determining the market value of your property, but do not take these as examples to copy. What you will see is the market price of the properties that have been sold.

This is often different from the market value, so while you should consider it when calculating the market value of your property, you shouldn’t take it as gospel.

Try entering your postcode onto sites like Zoopla to gain more information about this.

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3. Research the Local Region

Knowing the local area can help with valuation. Factors such as schools, job opportunities, entertainment, and crime rates can influence market values, and you should take them into account when calculating the market value of your property.

Properties in areas with good schools are more likely to attract families who will want their children to be well-educated. Areas with fewer schools or ones that are not performing well are likely to be avoided by parents.

Crime rates in your area can also affect the market value of your property. Safer neighbourhoods will attract more people to move there, whereas properties in areas with higher crime rates will lower the market value.

Other establishments near your property like shops, restaurants, and tourist attractions will also affect the market value of a property. If there is little in your local area to do, then fewer people will want to move there.

How Do Estate Agents Calculate The Market Value Of A Property?

Professional opinions can vary when calculating market value. Quite often, the last 20% of the value is subjective. This means it is down to the individual opinions of the person valuing the property to determine the final value.

You could ask five estate agents to value your property and you could get five different valuations back. With all this confusion you may be wondering: how do professionals calculate market value?

Estate agents will use several different methods when conducting a property valuation, and we will break some of them down for you now:

1. Comparison

If there is an active market in your area, you can compare the transactions of those properties with your own. Try to find at least three properties of a similar size and build to your own that have sold in the last three months.

This will give you a recent indication of how the property market is doing in your area. It is important to note that new builds‘ market values may differ from older buildings.

You can find if sold properties are similar to yours by listing all the key information about your property and comparing it to those sold.

This includes details like the square footage, the age of the property, the number of bedrooms and bathrooms, the overall condition of the property, and other things like any garages, pools, or gardens.

Once you have this information, you should calculate the average price that the properties sold for, and add on or take away additional values based on aspects of your property that the sold ones do not have.

You can also calculate a market value by square foot. Work out the square footage of the sold properties you are comparing and divide the price they sold for by this number. This is good with comparison properties of a different size to yours.

2. Profits

If the property you are calculating a market value for is a larger property or a unique building like a hotel, then comparing with recent sales may not be an option.

This kind of valuation is well-suited for buy-to-let properties like flats or rental properties.

In this case, you will want to find the market value by evaluating the profits that the business generates. This can be from finding the net annual income of the property.

Profits can be generated from rental payments made by tenants or from businesses within the building. If the profit is from tenancies, you need to take into account any vacancies the building currently has.

Once you have worked out the net annual income, you need to also work out the net operating income. This is done by taking all necessary payments such as bills, taxes, and utilities away from the profits to find out how much actual income is made.

To calculate the market value of the property, you need to find the capitalization or ‘cap’ rate, which is the rate of return you expect from the property.

You decide this by looking at the average return yield in the current market, so try researching rental yields or business returns in your area to find an average.

Once this is done, you divide the net operating income by the cap rate to find an estimation of the market value for your property.

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3. Residual

The residual method of valuation is best used for properties that are not fully developed or are expected to be rebuilt before the property is sold.

It calculates the market value of the property as it is now, by taking away the development costs of the land and the developer’s profits from the completed development’s value.

This is seen most often in buildings in need of renovations, buildings set to be demolished and rebuilt, and unfinished developments.

You need to first work out how much will be made from the sale of the property after development has finished. Then calculate the collected costs of development such as materials, labour, and insurance. 

Next, calculate the expected returns on the investment. This depends on if the expected sales price of the property will be met, how long it takes to complete the sale, the worst estimation of construction costs, and other contingencies which may slow things down.

Once you have this information you can work out the residual value of the property. Bear in mind that this process relies on many variables, and is more of a prediction for the future than an estimation for now.

4. Contractors

This method of valuation is rarely used and is mostly reserved for very unique properties that do not come on the market very often. As such, it is not recommended for more common properties like houses.

Generally speaking, this involves working out the cost of the land as well as how much the properties on the land cost to be constructed. Construction costs include materials, manual labor, insurance, and specialist personnel like architects.

This is done by calculating costs at a rate per square metre and then making depreciation allowances.

It is not recommended to use this method for regular properties, and it is often only used by professionals when more common forms of valuation are not working.

It is not overly accurate or reliable, and there are better methods of calculating an accurate valuation.

 

Most estate agents will use the first three as they can commonly provide an accurate assessment of most properties. There will be variation between different market value opinions, but you can find a healthy middle ground to work with.

When calculating market value, it is important to consider capital appreciation as well. Seeing how a property’s value will increase in time is a key step in the process.

You should also be aware that market values include room for negotiation, so having a property valued at £200,000 does not necessarily mean you will sell the property for that price.

If you would like to learn more about calculating market values, please get in touch with our knowledgable team. We would be more than happy to answer any questions you have.

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