How much is your property worth? 5 valuation types to know and understand

Pricing correctly from the start is vital - so start by knowing the different types of evaluations and setting your asking price being well-informed about what your property is truly worth.

Today's world is characterised by the availability of information, but with this easy access comes the risk of misinformation and disinformation sending DIY knowledge-seekers astray - and this is especially true when it comes to evaluating your home in order to list it for sale. 

According to Schalk van der Merwe, franchisee for the Rawson Properties Helderberg Group, the property industry is far from immune to the impact of incorrect or misleading information when it comes to valuations.

"Most people are aware of the importance of keeping an up-to-date and accurate valuation of their properties on hand," he says. "This isn't just for sales purposes: it's also vital for things like monitoring investment growth, assessing the potential for improvements, and making sure you have adequate insurance coverage. 

READ: Reliable Asset Valuation | Why the highest evaluation is not necessarily the best

"What very few people realise, however, is that there are actually different valuation types and methods designed to give the most useful feedback for each of these cases," he continues. "Without understanding the difference between these valuations, it's easy to be misled into thinking your property is worth more or less than it actually is on the open market."

• Market Value

Market value is the most common valuation type, and the one most real estate agents provide to homeowners. It's an estimation of what a property can be expected to sell for on the open market if it were listed at that time.

 "It's important to understand that market valuations are an art as much as a science - for the most accurate results, you'll want to make sure your real estate agent isn't just using automated data. They also need to take their own in-the-field experience of current market activity into account and provide a well-substantiated document that clearly explains where your property fits into the sales landscape," says Van der Merwe.

• Replacement Value

Like the name suggests, a property's replacement value is the amount it would cost to replace both the land and the building with materials of comparable quality. This, Van der Merwe says, is useful for getting an indication of market dynamics, but has little to do with the amount a seller can expect to get for their property in a sale (its market value).

"When replacement value is much higher than market value - in other words, it would cost more to build a home than to buy an existing one of similar quality - it's a sign that the market is leaning in favour of the buyer," says Van der Merwe.

"If replacement value becomes lower than market value, you can assume the opposite is true and market conditions are favouring sellers. At the moment, we're definitely experiencing the former with replacement values much higher than market values in most cases."

• Insurance Value

Insurance value is related to replacement value, but excludes the cost of the land, and includes demolition expenses. Essentially, it's what a property owner would need to pay if their home suffered a major fire, for example, and needed to be partially or fully demolished in order to be rebuilt.

"This is a very important value to know to make sure you're adequately insured against a disaster," says Van der Merwe, "but again, it has nothing to do with market value, and cannot be considered a viable listing price."

• Municipal Value

Municipal valuations are, according to Van der Merwe, the least useful - and least accurate - valuation type. Conducted by the local municipality, these valuations are entirely automated based on semi-recent sales statistics. They take none of a property's unique characteristics into account, and can be hundreds of thousands of rand off a realistic market value.

"We highly recommend property owners have a market valuation done by their local real estate agent whenever their municipal valuations are updated," says Van der Merwe. "We've managed to save some of our clients thousands of rand in rates and taxes by helping them appeal inaccurate municipal valuations. I certainly wouldn't suggest basing listing prices off municipal figures unless you want to risk seriously under- or over-pricing your sale."

• Indexed Value

The last common valuation type a property owner may encounter is the indexed value. This, Van der Merwe says, is a very useful tool for assessing an investment's performance, but again, cannot be substituted for market value.

"A property's indexed value is calculated by taking its most recent sales price - what it cost its current owners when they bought it - and then adding the average property inflation to that for each year until the present," he says. "This shows what that property would be worth if it had experienced average price growth over that time. It can then be compared to a current market valuation to see whether the property has matched, over-, or under-performed the market."

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Know the difference

While all of these valuation types have an important role to play for property owners, Van der Merwe says knowing the difference is equally vital.

"A good real estate agent will not only be able to provide any of these valuation types, they will also make sure you fully understand their different applications," he says. "If you're ever in doubt and your agent isn't forthcoming with an explanation, you may want to question their motives and consider finding a new real estate partner."

READ: Price correctly from the start | Tips for a speedy sale

You don't have to be offering the cheapest property on the market to achieve a quick sale, rather it needs to be well priced in comparison with similar properties, says Denise Dogon, founder of Dogon Group Properties who says that notwithstanding the economic woes being experienced in South Africa, DG is still seeing success in the market - with the company's recent sales for winter 2020 being their best ever for what is traditionally a quiet time of the year.

The longer a property remains on the market, the higher the probability that the eventual selling price will be substantially lower than the original asking price. Regardless of the market you find yourself in, in any geographical location around the world, this remains true.

"Pricing the home correctly from the outset, therefore, becomes critically important", says Andreas Wassenaar, Seeff's Licensee and Principal at the Zimbali office.