A free flow of information in the market is essential in the decision making process behind those transactions. The internet has revolutionized the availability of information on property prices and has made it accessible to everyone; whereas before only people in the industry had such information. This has enabled many more people to join the property owning community. In the UK, there are two prominent methodologies for deducing the value of a buy to let property:
(i) The comparable (‘comps’) method – most commonly used by property investors but requires regular transactions to be happening to be effective;
(ii) The yield / income method – commonly used in the commercial property sector (and also advocated by several prominent stock market investors including George Soros Warren Buffet): the yield is calculated by dividing the annual income by the overall asset value. Whilst capital growth gains should always remain a fundamental part of any buy to let investor’s strategy – cash flow will always remain ‘king’ and ensuring that you are making a healthy profit every month will enable you withstand any shocks, regardless of how the market is behaving. Also note that we refer to a gross figure here (costs such as management, insurance, maintenance, repairs etc would have to be deducted).
Professional property surveyors base their assessment of value not only on comparable evidence of similar transactions (where available) but also on their assessment of current market sentiment as well as the volume of properties being traded. There are also a number of external factors that can effect valuations, for instance the general state of the economy, interest rates, government / taxation policies and environmental factors.
When surveyors adopt a conservative view, this should reflect a stringent approach that parties are taking in actual transactions and the uncertainty of the market of which they form part of. It is also important to bear in mind that surveyors blackpool professional surveyors would agree that, in reality, value is what one person will pay to another for a property and, if value is not to be skewed, both parties must be well informed and acting in an arm’s length relationship.
Due diligence is the fundamental stage of being able to deduce a property’s potential. Broad based data on transactions is available through many websites and local trends can be obtained via contacting the Department for Communities and Local Government. Whilst several of these indices have been called into question with regards to their methodology, they are a great way to understand general movements (we would recommend regularly examining 3 to 4 on a simultaneous basis).