How to value a flat before you offer
Buyers routinely make offers without any structured view of what a property is worth, relying on a general sense of the node and whatever the agent has said. Valuation is not difficult, and doing it properly changes both what you offer and how confidently you can defend it.
The three approaches
The comparable sales approach values a property by reference to what similar properties have actually transacted at. For residential flats this is the primary method and the one a buyer should rely on.
The income approach values a property by the income it can generate, capitalised at an appropriate rate. It is the natural method for a let investment and secondary for a home you will occupy.
The cost approach values land plus the cost of replacing the building less depreciation. It rarely drives residential pricing but matters for older buildings where redevelopment potential is part of the value.
Most residential decisions rest on the first, sanity-checked against the second where the property might be let, which is the approach worth learning.
- Comparable sales: the primary method for residential flats
- Income approach: natural for a let investment
- Cost approach: relevant where redevelopment potential matters
- Use comparables, sanity-checked against income where relevant
Building a comparable set that is actually comparable
This is the whole exercise, and it is where most informal comparisons fail. Four variables must match before two prices can be compared at all.
The same sector or micro-location, because as our note on the biggest mistakes buyers make sets out, intra-node variation frequently exceeds inter-node variation.
The same building age band, since older and newer stock in the same sector are different products regardless of similar asking prices.
The same carpet area on the RERA definition, which our note on carpet area versus built-up area covers, and a similar floor, since floor rise is a real component as our note on which floor to buy explains.
Transacted prices, not asking prices
An asking price tells you what one seller hopes for. A set of asking prices tells you what several sellers hope for, which is not more informative.
Ask agents for recent transactions in the building or immediate sector, and ask more than one agent so that a single source is not shaping your view.
The ready reckoner for the location provides a floor and a sanity check, and our guide to ready reckoner rates explains what it is and firmly is not.
Where the gap between reckoner and asking prices in an area is unusually wide in either direction, that is worth understanding rather than ignoring, because it usually reflects something specific about the pocket.
- Asking prices reflect hope, not value
- Ask several agents for actual transactions
- Use the ready reckoner as a floor and a check
- Investigate unusually wide reckoner-to-market gaps
Adjusting for the differences
No two flats are identical, so a comparable is a starting point that needs adjusting for the differences between it and the property you are valuing.
Adjust for floor, aspect, condition, parking, and any specific advantage or defect. The adjustments are judgement rather than formula, but making them explicitly is far better than holding them vaguely.
Condition adjustments should reflect real cost. Where a flat needs rewiring and plumbing, our note on renovating an older flat covers why that is a larger number than buyers assume, and it belongs in your valuation rather than in your optimism.
Write the adjustments down. An offer supported by a written comparison is considerably more persuasive than one presented as a feeling, which our note on how much you can negotiate covers.
Why the lender's valuation differs
A lender values the property as security, which is a different question from what it is worth to you, and their number is frequently lower.
They are estimating what could be realised in a forced sale within a reasonable period, not what an enthusiastic buyer would pay in a good market.
Where a lender's valuation comes in below your agreed price, it affects how much they will lend and therefore how much you must contribute. Buyers who have not anticipated this find themselves short at completion.
Treat the lender's number as useful information rather than an insult. A valuation materially below your price is worth understanding before you proceed, and our note on what to do when a loan is rejected covers the wider position.
- Lenders value the property as security, not as a home
- Their number reflects a forced sale, not a good market
- A low valuation reduces the loan and raises your contribution
- Treat a materially low valuation as information worth investigating
Valuing for a let property
Where you are buying to let, run the income approach alongside the comparable one. Establish the realistic achievable rent from actual lettings in the building rather than from asking rents, then work back through the costs.
Our notes on rental yield in Kharghar and best areas for rental income cover how much maintenance, tax and vacancy reduce a gross figure.
Where the two approaches diverge sharply, that is informative. A flat valued high on comparables and low on income is being priced on owner-occupier demand rather than on its investment merit, which matters if you are buying as an investor.
That divergence is normal in premium nodes and is precisely why yields compress as a node matures.
A workable process
Collect five or six genuine transacted comparables matching sector, age band, carpet area and floor as closely as you can manage.
Adjust each explicitly for its differences from the subject property, and note the adjustment and the reason.
Take the resulting range rather than a single number, since valuation produces a band and pretending otherwise is false precision.
Then decide where in that range you are willing to buy, and be prepared to walk if the price sits above it. That last step is what converts a valuation from an exercise into a decision.
