- Evaluation Methods
The Purchase Price is usually determined when taking a mandate which is then used for marketing a property for sale or for rent. This amount can vary once an offer is made by a prospective buyer or tenant.
There are three main methods used when conducting a property evaluation. The most prominent and preferred method to use is the comparison method, as it’s directly linked to current market transactions.
- Comparison Method
The comparison method is used to value the most common types of property, such as houses, shops, offices, and standard warehouses. Ideally, the market should be stable and there should be multiple, recent lettings/sales of comparable properties (same size, location, condition, etc). The best comparable factors should be selected and analysed, and thereafter adjustments can be made for their differences. Finally, an estimated market value can be created.
- The Residual Method
The residual method could be used to value property with development potential or vacant land that is having its current use changed to something more profitable.
- The Investment Method
The investment method can be applied to determine the market value of a freehold or leasehold interest in a property from its potential to generate future income. It is typically used for the main forms of properties where a tenant is providing the landlord with an investment return on his capital cost (purchasing the building). Using this method, the comparable property transactions of sales and lettings are analysed to find the revenue.
The profit is thereafter applied to the future rental income, which is discounted back to the present day giving the net present value (NPV). This is finally used as an indicator of how much the building is presently worth.
- The Purchase Price
The purchase price is determined with all of the above taken into account and the purchase price is pre-determined with the seller, however, this might be an overpriced property and it is the agent’s duty to do price council with the seller.
The buyer will have his own price determined on the information given to him as far as the property advertisement as well as the guidelines from the agent.
It is imperative that the seller and buyer make use of all available tools to price the property and to offer the seller a purchasing price that is based on facts and not just an offer to see what he can get away with.
All amounts stipulated as the purchase price in a mandate or sale agreement need to be in numbers as well as written out, this alleviates discrepancies on a legally binding contract.
The Gross Purchase Price is the purchase price that is inclusive of commission. When concluding a mandate or a sale the gross or full purchase price is always the Purchase Price noted on the agreement which is always inclusive of commission unless stated otherwise.