The Property Valuation Process of Real Estate Agents in Bangladesh
Whether we want to buy or sell a real estate property, we need to know the actual value of the property. In the current world, the real estate industry is rapidly growing. The number of real estate properties is multiplied each year. The increased supply is an answer to the increased demand for real estate properties in Bangladesh. However, as the real estate market gets bigger, the market also gets competitive. The price of real estate properties is constantly fluctuating in the current market. Hence, the need for real estate agents is always in demand as the process of property valuation has become of critical importance for both buyers and sellers. For sellers, the proper valuation of the property will ensure a successful sale. If the property is undervalued, the seller will incur a loss, and if overvalued, the seller will have a tough time finding a buyer. The seller will eventually lose money for each day the property remains unsold. For buyers, knowing the proper value of a property will ensure a fair price purchase. As the market is competitive with many players, false advertisements and properties with overvalued quotations are increasing. Buyers can save themselves from paying more than the actual worth of the property by getting their property valued before purchasing.
Usually, real estate agents conduct the valuations of real estate properties. Clients come to the real estate agent to value their property for reasons such as sales listing, financing, property insurance, investment analysis, and taxation. But in most cases, real estate agents value property to determine the asking or purchase price of a property. However, valuing a real estate property is a difficult task since each property comes with unique features such as location, floor size, lot size, design, and additional amenities. The following article will explore the methods that the real estate developers in Bangladesh use to determine the value of a property.
Basic Valuation Concepts
In technical terms, the value of a property is the present worth of all future benefits arising from that property. Unlike most consumer goods, the real value of a property is realized in the long term. As the valuation is conducted considering the impact of a long period, macroeconomic factors such as economic trends, social trends, environmental impact, and government regulations are taken into consideration. However, the value is calculated keeping four elements in mind.
- Demand: The need or necessity of consumers for a property that is backed by financial strength.
- Utility: The Property’s ability to satisfy the need of its owners.
- Scarcity: The limited supply of similar properties in the area.
- Transferability: The ease with which current owners can transfer ownership to new owners.
Value Versus Cost and Price
The value of the property is not necessarily the cost of the property. The cost of a property is the actual expenditures on building the property. The cost is the sum of the labor expense, material expense, and other additional expenses. The cost of a property certainly affects the value of the property, but it does not determine the value of the property. For example, building a ready flat in Dhaka may cost 40 lakh BDT. But if the regulatory body finds any critical fault in the foundation, the value of the apartment will drop significantly. Similarly, if the same apartment is built with a perfect foundation and is situated in Gulshan, the value of the apartment will be many times more than its actual cost.
The market value of a property, the price at which the property will be competitive in the open market, is determined by an appraisal. Before making any decision about the transaction of any real estate property, concerned parties such as individuals, businesses, government agencies, investors, banks, or mortgage companies evaluate the appraisal reports for a period of time to determine the property’s future value. The market price is the property’s actual value. However, the market does not always represent the true value of a property. For example, the seller may decide to sell a property at a lower price than its actual worth due to the pressure of foreclosure, or if the property is private, it can be sold at a lower price than its market value.
An appraisal is an estimate or opinion about the value of a property on a specific date. The goal of preparing an appraisal report is to determine the property’s competitive market value. An accurate appraisal report depends on the precise and methodical collection of a critical data set. Such as data related to the property’s cost, material cost, market price, location demand, amenities, and other general and other related data. The appraisal method of property valuation can be approached in three methods.
Method 1: Sales Comparison Approach
The sales comparison approach, also known as the market data approach, is mostly used to determine the value of single-family apartments, houses, or lands. In technical terms, the sales comparison approach is an estimate of a property’s value that is derived from comparing the sales prices of a similar type of property or comparable properties in the area in the recent past. To be recognized as comparable properties, each must have the following attributes:
- As similar as possible, especially the size and location, to the subject property
- Have been traded within twelve months in a competitive and open market
- Have been traded under a normal market situation
To prepare an appraisal report, the agent needs to use at least four comparable properties. It should be noted that the critical factors in choosing a comparable property are size and location. However, in most cases, the location of the property has a greater impact on the value of the property rather than the size. In addition to the size and location of the property, the age and condition of the infrastructure is also critical factor. Agents critically focus on the date of sale too. Economic changes impact the value of a property. Hence, the date of sale indicates at which economic cycle the property was last sold. Agents also evaluate the terms and conditions under which the property was last sold. Because the property was sold to relatives or close friends, the seller might give the buyer a discounted price. If an agent considers the discounted price for the sale comparison valuation method, he or she will undervalue the property.
Usually, to reach the final valuation number, agents use a weighted average value of all the comparable properties. Because many of the property’s physical features such as landscape, amenities, number, and design of rooms, quality of interior decoration, and other features are subjective to buyers. Hence, the agent adds weight to comparable properties to maintain a fair value.
Method 2: Cost Approach
The cost approach method of property valuation is solely used for valuing constructed properties on the land. Only lands cannot be valued using the cost approach method. This method consists of two separate evaluations for the building and the land. Another key aspect of this approach is that this method takes depreciation under consideration as well. So, the final estimated value is based upon the value of the building and the land while subtracting the depreciation. The cost approach method assumes that reasonable buyers will not pay a higher price than the overall cost of the property and the value of the land. Agents use the cost approach method to determine the value of properties that are not frequently traded and are not used to generate income. Such properties include personal houses, schools, hospitals, religious institutes, and government buildings.
While the cost approach method is a combination of both the value of the land and the building, the land is valued using the sale comparison method. Only the value of the building is calculated using the cost approach. The cost of the building is calculated in several ways. Agents in Bangladesh usually use the square foot method, where the cost per square foot of a recently built comparable property is multiplied by the square foot of the subject property building. Another method is called the unit-in-place method, where the cost of the building is calculated based on the cost of each unit of material that was used to build the building. Lastly, there is another method that is used when the property is very large in size. The method is called the quantity-survey method, where the price of each material that will require to build a similar in the current time is considered. The current market of raw materials is considered the base. Additional costs of installation are also considered in this method.
Depreciation is a key element in the cost approach valuation method. Depreciation regards the fact that the value of the building will deteriorate with time as the physical, functional, economic, or social condition of the property changes negatively. Physical conditions deteriorate when a certain part of the property gets old and requires replacement. Usually, the paint and the condition of the roof deteriorate. There are certain physical problems that cannot be fixed, such as the structural issue of the property. Functional damage occurs when a certain feature of the building seizes to function. For example, the waterline may not function properly anymore, or the internal electrical system may start to malfunction. The economic condition is a macro factor. However, it affects the value of the property. If the whole economy starts going through a bear phase, the value of the property will face its impact. Finally, the social factor includes the adjacent areas of the subject property. For example, if a polluting factory gets built just by the property, the value will decrease. On the other hand, if a good school or a beautiful park gets built nearby, the value of the property will rise.
Method 3: Income Capitalization Approach
The income capitalization approach, also known as the income approach, is a method that calculates the value of a property based on the connection between the rate of return for the owner and the net income that the property can generate. The income approach is most suitable for the properties that are built to be put out for rent. The valuation is very simple as the agent calculates the possible future income that the subject property can generate and estimates its current value. However, the income approach assumes that in the future, all the factors that may affect income will stay normal.
To perform the valuation, firstly, the agents will estimate the annual gross income for the property. Then the vacancy period and potential rent collection loss will be taken into consideration to calculate the effective gross income from the property. Then the annual operating expenses will be deducted to calculate the net operating income from the subject property. Once the net income is calculated, then the agents will estimate the price a rational investor will pay for a similar level of net income using the data of industry rate of return or capitalization rate. Finally, the agents will incorporate the capitalization rate into the subject property’s annual net income to calculate the final estimated value of the property.
The valuation of a property is not an easy task. The process is lengthy and time-consuming. However, the significance of property valuation is enormous. Skilled real estate agents to conduct real estate property valuation using either of the mentioned three methods. While each method is best suitable for a certain type of property, all methods should generate a relatively similar estimated valuation. The actual value of a property is a piece of very important information for not only buyers, but anyone can gain benefit from it.
How can I be sure of the skill and credibility of a real estate agent?
Ans: You should read the former client reviews and then follow your instinct. To be on the safe side, you should employ your real estate agent from a reputed real estate company in Bangladesh such as Mir Real Estate.
How much does a real estate agent charge for a property valuation?
Ans: The fee of a real estate agent depends on the value of the property.
How long does a property valuation report remain valid?
Ans: There is no official expiry duration for a property valuation report. However, banks do not accept property valuation reports that are more than six months old.
Can I conduct the property valuation on my own?
Ans: Technically, you can. However, if you are not from the real estate industry and do not have much knowledge of the real estate market, you are likely to miscalculate.
How long does it take to complete a property valuation?
Ans: The duration to complete a property valuation depends on the size of the property. Usually, the valuation is completed within one week to three weeks of time.