Behind every valuation figure is a method: a structured way of turning market evidence into an opinion of value. When the method suits the property and the evidence is sound, the figure is reliable. When either is wrong, the result can be misleading.
Methodology matters most when a valuation report will be tested by another party, such as a family lawyer, the ATO, the State Revenue Office or a court.
For Melbourne properties, from Brunswick terraces to Dandenong South warehouses and townhouse sites in the eastern suburbs, the valuer's first task is to identify how buyers in that market actually price the asset.
What is a property valuation method?
A valuation method is a recognised technique for estimating market value. Australian valuers apply methods consistent with Australian Property Institute guidance and the International Valuation Standards.
Each method is designed to mirror the reasoning of an informed buyer. A home buyer compares houses; an investor compares yields; a developer works back from the finished project.
The main valuation methods
Direct comparison
The standard method for residential property. The valuer analyses recent sales of similar homes and adjusts for land size, accommodation, condition, location and features.
It works well for typical houses in suburbs such as Reservoir, Werribee or Ringwood, where there are many comparable sales.
Summation
The value of the land is added to the depreciated cost of the buildings and other improvements. It is useful as a cross-check and for properties with limited sales evidence, such as lifestyle acreage in the Yarra Valley or Macedon Ranges.
Capitalisation ofincome
The main method for leased commercial and industrial property. Net income is converted into a capital value using a market yield drawn from comparable investment sales.
It is widely used for shops along strips such as Chapel Street and Sydney Road, offices in the CBD and Richmond, and warehouses in Dandenong South, Truganina and Laverton North.
Hypothetical development(residual)
Where a site's value comes mainly from what could be built, the valuer estimates the completed development's value and deducts costs, risk and profit. This often applies to large blocks with townhouse or apartment potential near activity centres.
Discounted cash flow
Applied to larger commercial assets with complex income profiles. Future income and expenses are projected and discounted to a present value.
What makes a method accurate?
A method tends to produce a reliable result when:
It reflects how buyers in that market price the property
The supporting sales, rents and costs are recent and relevant
Adjustments are reasonable and clearly explained
Yields and development assumptions are drawn from market evidence
Zones, overlays and title restrictions are correctly identified
A second method confirms the result where suitable
The best method in the world can't fix weak evidence. Both must be sound.
How a valuer chooses and checks the method
1.Identify the property and purpose
The valuer confirms the property, the interest being valued, the valuation date and the purpose of the report.
2. Determine how the market prices it
Owner-occupied homes are usually compared directly. Leased commercial property is usually priced on income. Development sites are priced on what they could become.
3. Gather and analyse evidence
The valuer researches sales, leases, yields and costs relevant to the chosen approach.
4. Apply a primary method
The main method produces the core opinion of value.
5. Cross-check and reconcile
A secondary method tests the result, and any gap is investigated and explained.
Valuation methods compared
| Method | Typically used for | Key evidence | Melbourne example |
|---|---|---|---|
|
Direct comparison
|
Houses, units, vacant land
|
Recent comparable sales
|
A family home in Reservoir
|
| Summation |
Lifestyle and rural property; cross-check
|
Land sales and building costs
|
Acreage in the Macedon Ranges
|
| Capitalisation |
Shops, offices, industrial
|
Rents and investment yields
|
A leased warehouse in Dandenong South
|
|
Hypothetical development
|
Development sites |
End values, costs, profit margins
|
A large block near Box Hill
|
|
Discounted cash flow
|
Larger commercial assets
|
Income forecasts and discount rates
|
A multi-tenant CBD office
|
Example: a large block in Glen Waverley
Consider an original 1960s house on a large block in Glen Waverley, within walking distance of shops and the train line. A family might buy it to live in, while a developer might see room for several townhouses.
A valuer may use direct comparison against similar house sales and a hypothetical development approach to test the site's redevelopment value. The applicable residential zone, any overlays, covenants on title and likely planning outcomes would all shape the final figure.
How two methods are reconciled
Where a valuer applies two methods, the answers seldom match exactly. Reconciliation is the step where the valuer weighs both results and arrives at one figure.
Using the Glen Waverley example above as an illustration, suppose, hypothetically, that direct comparison with house sales suggests around $1.6 million, while the hypothetical development approach suggests the land is worth around $1.75 million to a townhouse developer. The valuer would not just split the difference. They would consider who the most likely buyer is, how much development activity is occurring nearby, the planning controls that apply and the risk a developer would carry. If developers are regularly competing for similar blocks, the development value may carry more weight. If not, house sales may be the better guide. The report should set out that reasoning clearly.
What happens when the wrong method is used
An unsuitable method is one of the most common reasons a valuation is challenged. A figure can be calculated correctly and still miss how the market would actually price the property.
Some examples of a poor fit in Melbourne include:
Valuing a leased Dandenong South warehouse only by direct comparison. If the evidence is owner-occupier sales, the valuation may overlook the lease, rent level and tenant covenant an investor would focus on.
Valuing a townhouse site as an ordinary house. A large block near an activity centre may be worth more to a developer than to a family.
Relying on summation for a typical suburban home. The cost to build does not always match what buyers will pay.
Using a yield from the wrong market. A capitalisation rate from CBD office sales will not suit a strip shop in a suburban shopping street.
A sound report explains why the chosen method suits the property. That explanation makes the conclusion far easier for solicitors, accountants, auditors or the ATO to accept.
Information that helps the valuer apply the method
The documents a valuer needs depend on the method. Useful information often includes:
For direct comparison: building permits, renovation invoices, floor plans and photographs of the property's condition and features
For capitalisation: current leases, rent rolls, outgoings statements and details of rent reviews, incentives or vacancies
For hypothetical development: planning property reports, any planning permits or applications, site surveys and title covenants
For summation: building contracts, construction dates and details of significant improvements
For apartments and units: owners corporation certificates, fee notices and minutes
Providing the right material early helps the valuer test the method thoroughly and usually reduces the time needed to complete the report. Where information is missing, the valuer may need to make assumptions, and those assumptions will be stated in the report.
Frequently asked questions
What is the most common valuation method for Melbourne homes?
Direct comparison. Most houses and units are valued against recent comparable sales, adjusted for differences.
Why does land size matter so much in some Melbourne suburbs?
In established suburbs with redevelopment potential, buyers may value the land more than the existing house. A valuer considers this when choosing the method.
Will my valuation report explain the method used?
Yes. A formal report should identify the method, the evidence used and how the valuer reconciled the result.
How is a leased shop or warehouse valued?
Usually by capitalising the net income at a market yield, with direct comparison as a check. Learn more on our commercial and industrial valuations page.
Can I choose which valuation method is used?
You can explain the purpose of the report and supply relevant information, but choosing the method is part of the valuer's professional judgement. The valuer should use the approach that best reflects how the market prices the property and explain that choice in the report.
Does the method change for a CGTvaluation?
The method is the same. For a historical date, the valuer uses market evidence from around that date.
Need a property valuation in Melbourne?
For a residential, commercial or development site valuation backed by a clear method, contact ValueMax Property Valuers for an independent report across Melbourne and regional Victoria.
