If you don’t know the value in a deal then it’s unlikely you’ll make a profit. Paying too much for a property or alternatively selling it too cheaply will make or break a deal, and if you want to be successful you need to learn not to do either. So, let’s think about how to put a value on our investments – in this instance, our residential investments.
There are three different methods to value property (The Direct Comparison Method, The Investment or Yield Method and The Residual Method), but if you’re buying residential property, you really only need to use “The Direct Comparison Method”.
The reason why I’m mentioning this is because there are some vendors, mainly seminar companies who also trade property to their clients, who will try to get you to value their properties using the “investment” or “yield” method. Why would they want to do this? Simply so they can get you to pay more – often more than the property is worth.
Now, there is one caveat I’ll make about this. Don’t be confused about HMOs (houses in multiple occupation). Although these look ‘residential’ in the sense that people live in them, a true HMO (with the required planning consent and Local Authority licence) is really “commercial” in nature and should be valued on yield. This means you need to use the investment or yield method.
For residential investment purposes, the investment method of valuation can be useful, but not actually for valuations. As a rough rule of thumb, if you need to value any residential property, whether it’s let or vacant, always start by finding the value assuming it’s a normal vacant possession sale. By that I mean assume it will be vacant without a tenant when you complete the purchase. This is because with one or two exceptions, this is how the marketplace values residential investment property.
So, how do we value a residential property using the direct comparison method? In other words, ‘single family’, aka ‘normal’ houses and flats. The clue is in the name and it’s pretty obvious.
The answer is we compare it directly with other identical or similar properties where we know the asking price, or perhaps where we may know the selling price. Suppose you are interested in buying a 3-bed semi on an estate which predominantly comprises of other 3-bed houses. First, we want to know sales prices of similar properties.
Whilst you can use a number of websites to look into this, one problem is that these sites won’t tell you the accommodation or condition so, if possible, I’d advise looking at the outside of those properties when you’re in the area to get a better idea of what they are like. For example, you might see that a property sold at a very good price but when you look from the outside you can see it has a large extension at the side. Or perhaps it has a garage but most houses on that street don’t. The more information you have, the more useful it will be.
If I see a “sold board” on a similar or identical property, I’ll ring the estate agent about it even though, strictly speaking, an estate agent should not disclose the actual sale price agreed. Whilst they probably won’t disclose the actual information, they should tell you what they were asking for it – and if you ask nicely, they might even tell you whether the sale price was close to the asking price.
The reason I’ll ring is because there’s a time lag between the sale being agreed and completed, and the sale price being made available through The Land Registry (which is where all these sites get their data). So, chances are, if it’s a relatively recent sale, asking the estate agent is the only way to find out the actual sale price.
It should be easy enough to find other similar properties for sale and to find out what prices are being asked. Rightmove, Zoopla and so on… are the starting point, although not all agents advertise on all of these sites. As such, it is worth making a note of ‘for sale’ boards and phone numbers when you are in the area so you can check with individual agents later.
When you’ve established asking prices for similar or identical properties and have knocked a bit off to reflect that these are only asking prices (in a hot market you might have to add a bit on if offers are coming in above asking prices), you might need to make other minor adjustments to the figure if comparable property is in better condition, or has a larger plot, or it has central heating and the property you’re valuing doesn’t.
Just so as I cover all bases, let’s think about investment property that is already tenanted. Well again, I’d say ignore the tenant (assuming they are occupying on a standard Assured Short-Hold Tenancy) and value the property as if it were vacant. Today, most valuers value on the basis of vacant possession.
I mentioned earlier that a true HMO can, and probably should, be valued on a yield basis using the investment method. If I were valuing a house in multiple occupation, I’d first try to work out the value of the individual units by assuming that I could sell them separately. If that were an unrealistic possibility without making some physical alterations, then I’d deduct the cost of those works from the cumulative value of the individual units.
An alternative, if it were clear that there’s a strong market in the locality for single residences, would be to work out the value of the property assuming it had been converted back to a single residence – and then knock off the cost of the work to convert it. If neither of these approaches are realistic, then you probably would have to use the investment method, and would need to capitalise the rent flow.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to: www.ThePropertyTeacher.co.uk/the-successful-property-investors-strategy-workshop.