House Valuation & Home Loan Property Valuation: Ultimate Guide to Property Value Estimation

Apply Now

14 OCTOBER, 2022

Homeowners are often interested to know their house's valuation irrespective of their decision to sell the house, pledge it as collateral or evaluate their net worth. A house is usually the biggest asset one owns, and it is natural to know what kind of returns this asset would fetch for them if needed. So, how does one calculate house valuation? This article aims to detail the various aspects of this process and provide guidelines for house owners to carry out this exercise.

Factors Influencing The Valuation Of A House

Let us understand the various factors that influence the valuation of your house:

External Factors

The external factors comprise elements outside the house that affect its valuation, such as pavement, roof outside the house, attractiveness, or curb appeal.

Internal Factors

Numerous internal factors contribute toward estimating the value of a house, such as - if the house is furnished or unfurnished, what is the carpet area, and how many bedrooms are there in the house. The internal factors represent the elementary characteristics a house possesses from the inside.

Location of the property

The location of your property plays a significant role in determining its value. Houses located in prime areas or well connected to the city/schools/offices/restaurants/hospitals have a higher worth.

Condition of the house

A critical element that comprises the valuation of a house is its condition. A well-maintained or recently renovated home with the latest fittings and up-to-date features would generate a higher worth.

Size of the house

Bigger houses with more bedrooms and bathrooms or larger spaces are appraised at a higher rate.

Comparables

A comparison is a handy tool that helps in valuation. You can look into your neighborhood to estimate the house value to generate a parallel analysis of your home.

Market conditions

play a significant role in valuing any property. Your house may be huge, recently renovated, and located in a prime area. However, if the market conditions are unfavorable, the valuation would drop. Supply and demand play a significant role in determining the value of a property. There could be a larger supply of similar houses in the neighborhood, causing a dip in the value. On the other hand, if the supply is less, but the purchasing power of individuals has decreased, it would again cause a decline in the property's value.

Calculating the Valuation of a House

You can use several approaches to determine the valuation of a house that you can also use for home loan property valuation. The top three methods used while valuing property are discussed below:

1. Direct Comparison

This approach requires research into the recent sales of similar properties.

Step 1: Make a list of the top features of your property.

Step 2: Research and understand the sales price of at least three comparable properties. In an ideal scenario, the properties you have used for comparison should have 70% similar features to those listed. Ensure that your dataset includes properties in the neighbourhood since location is a key determinant in deciding a property's valuation. Additionally, ensure that you research the houses sold within the last six months to attain accuracy.

Step 3: An analysis would fetch the benchmark price of the property. You may calculate the benchmark value using either of these methods:

Average the value of the three properties to generate a property value estimate.
Compute the price per square foot and multiply that by the total area of your property.

Step 4: To know your property value, make the necessary adjustments considering the differences in your listing, such as the view from the house and the internal factors of your property.

2. Cost-based approach

The cost-based approach assumes buyers would not be willing to pay more for an existing property than the price involved in constructing a comparable building or purchasing a comparable lot.

Step 1: Estimate the amount required to rebuild the current property.

Step 2: Depreciate the value of the house over time

Step 3: Arrive at the property value.

3. Component Approach

The component approach uses a summation of the different components, such as land price and building cost, to attain a fair value for the property.

Housing Loan Calculator

If you are seeking a home loan, using a housing loan calculator is the best way to estimate your EMIs. It is a simple, reliable, and efficient manner by which you can manage your finances and repay your dues efficiently.

Calculating the Value of the Property for a Home Loan

You can turn only a specific value of a property into home loan installments. Such a percentage of value that a lending institution decides to lend constitutes the loan-to-value or the LTV ratio. A lower value of this ratio helps the buyer get lower interest and more attractive loan terms. The formula for calculating the LTV ratio is shown below:

LTV ratio percentage = Mortgage amount/Market Value of Property*100

Suppose you select a property worth Rs.80 Lakh, and your LTV ratio is 80%. The maximum amount of loan you would be eligible for is Rs.64 Lakh. The LTV ratio is directly proportional to the market value of the property.

Conclusion

While calculating the market value of a property, it is essential to understand its constituent elements. You may select a suitable well-structured, and diligent approach to estimate your property's worth. Before buying a house, individuals seeking home loans must conduct proper research to evaluate the property's value and the loan-to-value ratio. Individuals looking to obtain a home loan or a loan against property can also utilize the services and housing loan calculators provided by lending institutions to evaluate the property. The process to ascertain the valuation of the house can have different approaches, and the individuals can pick a methodology that best suits their requirements.