How is a professional valuation done?

A valuation is a professional, defensible opinion of value for a defined property right, at a specific date, prepared under recognised standards. It is not a guess, not the asking price and not what the owner hopes to get: it is an estimate built from evidence and reasoning, which can be examined, challenged and defended.

Price, cost and value are three different things

The words are used interchangeably in everyday speech. In valuation they mean very different things, and confusing them is the most common mistake.

• Price is what someone actually paid — a fact, fixed at a single moment, and it may be a good deal or a bad one.
• Cost is what it takes to create or replace the property: land, materials, labour, fees. The market does not reward spending — a fine house in the wrong place is worth less than it cost.
• Value is what the property is worth to a typical, informed buyer under defined conditions. An opinion — but a disciplined, evidence-based one.

What “market value” really means

Most valuations are reported on a basis called market value: the price a property would most likely exchange for between a willing buyer and a willing seller, in an arm’s-length transaction, after proper marketing, with both acting knowledgeably and without compulsion. Every phrase is load-bearing — neither side is forced, the two are independent of each other, and the property has been genuinely exposed to the market. Other bases answer other questions — investment value for one specific owner, fair value for financial reporting, market rent for letting — so naming the right basis up front is part of the job.

What moves the number

Value follows the best legal use rather than the current one — physically possible, legally permitted, financially feasible and maximally productive — which is why a bungalow on a plot zoned for apartments can be worth more as development land. Within a given use, location dominates, followed by size and layout, condition and build quality, legal status, energy and amenity, and the market itself on the valuation date.

The three approaches to value

However sophisticated a valuation looks, it rests on one of three ways of thinking — comparison, cost or income. The approach is chosen to fit the asset and the available data, and more than one is often applied as a cross-check.

1 · The comparison approach

The dominant method for homes and flats. Recent sales of similar properties are collected, then adjusted for their differences from the subject — floor level, condition, size, view, parking — to reach an implied value, usually in a systematic grid.

2 · The cost approach

Where comparable sales are scarce — new, unique or special-purpose buildings — value is built from the ground up: the land, plus what it would cost to rebuild today, less depreciation for physical wear, outdated layouts and systems, and value lost to factors outside the property.

3 · The income approach

Where a property is held as an investment, its value flows from the income it produces. The simplest form, direct capitalisation, divides a single year’s net income by a market-derived rate.

That cap rate is a snapshot read from the market. Its forward-looking counterpart, the discount rate, is built up from a risk-free return plus premiums for illiquidity, location, tenant quality and building age: higher risk, higher rate, lower value. For larger assets, income is projected year by year and discounted back to today in a discounted cash flow model — never better than its assumptions.

How a valuation actually happens

Behind the number is a disciplined sequence, in which each step protects the ones that follow.

1. Scope of the engagement. Purpose, basis of value, property rights, valuation date and any special assumptions.
2. Document collection. Title, land-registry or cadastral extract, floor plans, permits, energy certificate, leases.
3. Inspection and measurement. Areas measured to a consistent standard, condition assessed, and what is built checked against what is permitted.
4. Due diligence. Documents verified against reality and against each other; irregularities, encumbrances and easements flagged.
5. Market analysis. The relevant segment defined, comparable evidence gathered and verified.
6. Method and report. The approach applied, the result reconciled, and the reasoning set out in writing.

Two ideas run through all of it. Verification means the file is never taken at face value: what the permits allow can differ from what is physically there, and that gap hits value and sometimes saleability. Transparency is the other — the reasoning lands in a structured report, so the path from evidence to number can be followed by anyone reading it.

Standards, and the tools around them

Because so many decisions ride on valuations, the work is governed by recognised standards that make results comparable across borders: IVS as the global baseline, the RICS Red Book and USPAP as leading professional rulebooks, EVS in Europe and IFRS 13 for fair value in financial reporting. Underneath them sit competence, independence, objectivity and transparency — independence above all where a valuation feeds a lending decision.

The tools are modernising fast, from BIM and spatial data to automated models that price large volumes of standard homes in seconds. They inherit the quality of their data and struggle with the unusual and the non-compliant. Technology sharpens the evidence; the judgement that weighs it stays human.

Key takeaways

• Value ≠ price ≠ cost. A valuation estimates value; the other two are clues to it.
• Market value is the standard basis — willing parties, at arm’s length, after proper marketing.
• Three approaches do all the work: comparison, cost and income.
• Process and standards are what make a number trustworthy.

This article is an educational overview of valuation principles and uses simplified examples for illustration. It is not a valuation, valuation advice, or a substitute for a qualified professional’s opinion on a specific property. Methods, terminology and regulations vary by jurisdiction.