Our Valuation Methodology Explained
When you reach the point of buying, selling or restructuring your real estate agency, the big question is always: how much is my business actually worth?
The value will largely come down to your rent roll as this is the area which generates repeat business, but it will also include factors such as your business performance, market reputation, team and back-end systems.
Take a look at how we value rent rolls and entire agencies at BDH Valuers:
Valuing a rent roll
There is a single recognised method for valuing a rent roll in Australia, which relies on International Valuation Standards and the official definition of market value. However, while the overarching framework for valuation is consistent, valuers differ in how they apply the data within that framework. This distinction can affect the final figure.
When valuing a rent roll, BDH Valuers applies an annualised income approach using current data as at the valuation date. Many other valuers rely on historical data drawn from the previous 12 months, and the difference can be significant.
Historical versus current data
Two formulas are commonly used when valuing a rent roll.
The first relies on historical performance data. Under this approach, a valuer examines the previous 12 months and considers factors such as:
Properties under management
Average weekly rent
Average management fee
Additional income through fees and charges
Number of landlords
Outstanding accounts
Business operating costs
These figures are then used to determine value, typically by applying a market multiplier.
The second, ‘annualised’ approach relies on the same categories of information, but uses data that reflects the position of the rent roll as at the valuation date. This is sometimes referred to as settlement data. We believe this is the more accurate method because it captures the most current position of the business.
The key difference lies in timing.
Historic reviews average performance across the previous year. The resulting figures do not necessarily reflect recent rental increases, changes in commission rates or new managements added in the months leading up to valuation, and may not reflect properties that have been lost.
An annualised approach takes the rent roll as it stands at the valuation date, incorporates the current rents and commission rates and annualises those figures to determine the present earning capacity.
Why an annualised approach matters
Consider an agency that has managed an average of 500 properties over several years but has grown to 600 properties over the last eight weeks. Taking the historic approach to rent roll valuation may understate the value because it averages income across a period when the roll was smaller.
Conversely, if an agency has reduced from 500 properties to 350, relying on historic data may inflate the figure beyond what a purchaser would reasonably pay.
The annualised method reflects the business as it is now.
The methodology we apply at BDH Valuers is straightforward and includes annualised management fees as at the valuation date, assuming properties are occupied and not in arrears, multiplied by the appropriate market multiplier.
The multiplier itself is influenced by a range of factors including:
Number of properties under management
Management fee percentage
Actual rent levels
Arrears and vacancy rates
Ancillary fees
These factors sit within the framework of International Valuation Standards and the definition of market value. The objective is to determine the price that a willing buyer and willing seller would agree upon.
Valuing the whole real estate agency
Although the rent roll is typically the principal asset within a real estate agency, it is not the only component.
NPS scores, staff retention and operational stability can influence risk and therefore impact the multiplier applied. These aren’t always easy to measure in a straightforward dollar value, especially when it comes to less tangible assets such as reputation and goodwill.
Other considerations include:
The number of similar agencies currently on the market
Recent comparable sales
Buyer demand
Geographic location of the agency and rent roll properties and the property/rental markets in these areas
A valuer who specialises in real estate, has a track record of valuing agencies and can explain their approach in detail is the best choice to determine the value of an entire agency.
How to get real estate agency valuation right
A real estate sale will usually involve reports from two valuers, one on behalf of the buyer and one on behalf of the vendor. Where two parties obtain independent valuations, it is essential for both valuers to take the same approach.
If one valuer uses historic data and another uses current annualised figures, the results may be wildly different. This can complicate negotiations in any circumstances.
Ideally, the valuer will issue a letter of engagement at the outset. This should clearly state the basis of valuation and the methodology to be applied. If another valuation is being undertaken, it makes sense for both valuers to agree how data will be used and interpreted.
We always recommend documenting the agreed formula in a Heads of Agreement before proceeding with negotiations, to reduce the back-and-forth involved in a real estate agency exchange.
Clarity at a critical time
Whether you are selling part of your rent roll to release capital, exiting a partnership or obtaining finance to expand or purchase an agency, the valuation must reflect reality.
The risk of overpaying or selling for too little is high if the figures your valuer comes back with do not reflect genuine market conditions and take the wrong numbers into account.
While neither of the historical or annualised valuation formulas are inherently right or wrong, we firmly believe in applying current data and annualising income at the valuation date in order to provide the most accurate reflection of real-time value.
If you’d like a detailed explanation of how much your real estate agency is worth in today’s market, contact BDH Valuers today.
Valuation Methodology FAQs
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The value depends mainly on the rent roll, which represents recurring income, but it also includes business performance, reputation, staff stability, and the strength of internal systems.
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Historical valuations use the previous 12 months of data, while annualised valuations use current figures at the valuation date. The latter better reflects the business’s real-time performance and earning capacity.
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If one valuer uses historical data and another uses annualised figures, results can differ significantly, complicating negotiations. Agreeing on a consistent method upfront ensures a fair and clear process.