Exploring Property Valuation In Malaysia – Costing Vs. Comparison Method

·4-min read

Property valuation is an important part of any real estate transaction. After all - if you don’t know what something is worth, it’s very hard to agree on a fair price for it.

Whichever end of the property market you’re in, whether a first-time buyer making an exciting first step or seasoned investor acquiring your latest investment property, property valuation WILL play an important part in your journey.

How Does Property Valuation Work?

Property valuation is the process of making an informed estimate as to the value of a property, given the current market conditions.

These valuations are particularly important when it comes to securing a home loan.

Banks and financial institutions will use a valuation assessment to determine the total amount of a home loan they're willing to offer.

That means if you bid RM220,000 to purchase a property, but the bank values it at RM200,000, an 80% loan would only secure 80% of the value appraised by the bank.

So in that case you'd only be able to secure a RM160,000 loan. But, of course, this isn’t an estimate that just anyone can make.

property valuation, valuer, land valuation, property valuation methods, valuer definition, house valuation, property price
property valuation, valuer, land valuation, property valuation methods, valuer definition, house valuation, property price

Property valuations are undertaken by an official valuer registered with the Board of Valuers, Appraisers, Estate Agents and Property Managers (BOVAEA).

A qualified valuer must be accredited and registered by BOVAEA to undertake a property valuation.

Most banks work from their own established list of valuers to carry out these investigations.

The property valuer undertakes a land valuation, inclusive of the buildings/property, to determine their assessment of the value at the time of the survey.

It’s not always as simple as that though, as there are different property valuation methods which may be used. We'll look into two of the more common ones.

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Now, What Are These Common Methods?

They are the costing and comparison methods, which are more widely practiced for the purpose of valuation, due to their own set of unique strengths - but let's not get ahead of ourselves!

So what do these two actually mean?

1) Costing Method Of Property Valuation

The costing method for property valuation estimates the total cost of a property equal to the cost of building an equivalent property.

Essentially, this approach estimates a market value based on the cost of completely replacing the property with an equivalent construction on the same plot of land.

In simpler terms: take the cost of the land, plus the cost of the building itself, while offsetting the cost of any fall in value.

To add a sprinkle of added complication, there are two approaches to this.

1a) Reproduction:

Complete like-for-like replacement using the same materials and methods.

1b) Replacement:

Maintaining a building with the same function, but replacing elements where applicable, using current construction methods and design.

property valuation, valuer, land valuation, property valuation methods, valuer definition, house valuation, property price
property valuation, valuer, land valuation, property valuation methods, valuer definition, house valuation, property price

2) Comparison Method Of Property Valuation

The comparison method to property valuation is an approach which uses the value of recently sold comparable assets to determine the value of a property.

In real terms this will mean looking at similar properties within the area and using the sales prices they achieved to guide a valuation decision.

That means if you’re selling a two-bedroom apartment in a large high-rise complex, the valuer might analyse similar sales in your development over the last 12 months to understand what an accurate price estimate should be.

Pros And Cons Of Costing Methods Vs. Comparison Method

Each approach has its benefits and its drawbacks, and the circumstances of their use will depend on the property type, as well as other relevant conditions.

Costing Method

Pros

Cons

Good for valuing new build properties in areas without comparable assets

Often based on assumption of availability of land

Could help reveal overvaluation in new build property

If comparable vacant land unavailable, may reduce accuracy

Helpful for analysing property which is unique within its area

May deviate from true market value demonstrated by recent sales

Comparison Method

Pros

Cons

Simple and straightforward evaluation method

Can prove challenging to provide comparable properties

Based off actual transaction date

May rely on dated transaction figures

Provides an objective and evidenced market value

Extremely difficult to find comparison for unique properties with substantial added work completed

Relies on existing transaction data and thus challenging for some new builds

Which Is The Best Method For Me?

property valuation, valuer, land valuation, property valuation methods, valuer definition, house valuation, property price
property valuation, valuer, land valuation, property valuation methods, valuer definition, house valuation, property price

The property valuation method chosen is often determined by the circumstances of the asset, ensuring the valuer selects the right method to fit the property.

In most cases (in the residential market), that means the comparison method is used for valuations, with the costing method generally reserved for unique properties such as museums, temples, or schools.

The costing method does provide an additional resource for property valuation in certain circumstances however.

If your house has been substantially upgraded, it may be worth discussing the costing method to take into account the value you’ve added to your home.

There are also times where this method might be used as a tool to assess value if property, particularly new builds, is overpriced given current market conditions.

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