Identifying, sourcing, and applying objective evidence lies at the heart of any valuation, be it real estate or personal chattels. Comparable evidence in fixed property seeks to apply these principles using similar fixed assets. However, this is rarely an exact science, and therefore it requires somebody with deep experience to interpret the facts.
Comparable Evidence Suitable for Valuing Property
The best comparable properties come reasonably close to the following criteria, although it must be said that two properties are seldom identical:
- There should ideally be at least three other properties in the sample.
- These should be as similar as possible to the subject property.
- They must have sold recently under open market, voluntary conditions.
- The proceeds must be verifiable, and consistent with local practice.
The above are an ideal set of values, that arise in open markets where there are several potential or actual bidders. However, sales also take place in less active environments, involving properties that are relatively unique. An experienced RICS valuer should have the skills and judgement needed to factor these differences in and out, using comparable evidence in fixed property.
Why This Evidence Needs Critical Assessment
Many residential properties in Greater London look remarkably similar from the outside, because estates were developed as projects. However, as time rolled on they became quite different internally, as their owners improved them. Obtaining comparable evidence in fixed property therefore requires far more than casual viewing from the street:
- There may have been a limited number of similar properties on the market at the time.
- One or more of the interested buyers may have been willing to offer over market value.
- The subject property may have unique characteristics, for example history or location.
For these reasons comparable, recently sold properties will never be a perfect match to the subject property being valued. However, an experienced fixed property valuer should know how best to analyse and interpret the evidence that they do have available.
Property Valuation Without Comparable Evidence
The RICS Red Book Global Standards we reference in this article allow three methods to vector close to identifying a fair, reasonable and achievable fixed property value. We review each of these methods briefly in the next three paragraphs.
METHOD ONE – THE MARKET APPROACH
We analysed the pros and cons of this approach in the introduction to this article. The market approach is not always the right one for valuing residential property. It may, however, be appropriate when assessing undeveloped land.
METHOD TWO – THE INCOME APPROACH
Whereas a private investor may focus on the capital outlay, an astute investor may be more interested in income and / or growth. They are thus likely to use one of these two methods depending on their goal:
- The Conventional Investment approach derives a property value from net rental income, plus a capitalisation factor based on annual rate of return. The prospective investor will then assess this input on the basis of data from comparable properties.
- The Profits Method views a potential property as a springboard for a business opportunity. They might want to know whether the zoning allows a shopping centre, a student hostel, or even a nine-hole golf course, for example.
METHOD THREE – THE COST APPROACH
The cost approach becomes the fall-back position when neither comparable evidence in fixed property, nor the income approach are appropriate. This may apply to public buildings being sold off with restrictions on future use, or brand new buildings which have yet to be occupied.
A valuer tasked with rating properties of this nature should:
- Calculate the value of the land as if undeveloped.
- Calculate the depreciated value of any improvements.
- Confirm these values using comparables where possible.
Retrospective Property Valuations for Probate
The above three strategies aim for a realistic value for a property at the present moment in time. They all use current comparable evidence in fixed property to an extent. However, it is sometimes necessary to determine a value at an earlier date, for example when valuing an estate for probate.
The following aspects may for example become relevant when determining value for inheritance tax:
- Would the comparable evidence have been available on the day of the deceased’s death?
- How would that valuer have interpreted the information in terms of market trends on that date?
A Professional RICS Valuer Is Worth Their Salt
There are times when we can struggle through paperwork on our own, after trawling for answers on Google. There are also times when we should accept the limitations of our knowledge and experience.
Avery Associates has a panel of registered RICS valuers who are active throughout the South of England. Call 0800 567 7769 today for a free probate property valuation quote by a RICS surveyor. Everything you tell us will remain between us in strictest confidence.
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