When you buy, sell, borrow against or transfer property, someone will ask what it is worth. The answer matters for the price you pay, the loan the bank will give you, the stamp duty on the transfer and sometimes the capital gains tax when you sell. Yet many owners treat valuation as a mystery, and some are caught out by reports that differ widely. Understanding how valuations work helps you use them wisely. This guide is general information; use a registered valuer for any formal valuation.

What a valuation is

A valuation is a professional opinion of the value of a property at a particular date, based on evidence. The most common basis is market value: the price a willing buyer and a willing seller would agree on in an open market, with both acting sensibly. Other bases exist, such as forced-sale value, which assumes a quick sale at a discount, and insurance reinstatement value, which is the cost of rebuilding. Each answers a different question, so always ask which value is being given and why.

Who can value

Valuations for banks, courts, stamp duty and many other purposes must be done by a registered valuer. Check the valuer's registration and experience with similar properties. Be wary of agents who give a quick opinion as a sales tactic; their figure is an estimate and not a valuation. For major decisions, get a formal report.

How valuers decide

Valuers use several methods. The comparison method looks at recent sales of similar properties nearby, adjusting for differences in size, condition and location. The investment method values income-producing property by the rent it earns and the yield investors expect; see rental yield explained. The cost method adds the value of the land to the cost of rebuilding, less depreciation, and suits unusual buildings. The method used should be stated in the report.

What affects value

Location is the largest factor: access to roads, schools, shops and jobs. Then come the size and condition of the property, the title and any restrictions, services such as water and power, the neighbourhood and the state of the market. Documents matter too: a property with a clean title and proper approvals is worth more than one with defects. Land due diligence checklist before you buy lists what to check.

When you need a valuation

You may need one to buy or sell with confidence, to get a mortgage, to settle an estate, to divide property between owners, to insure it, or to support a tax position. A transfer is subject to stamp duty based on the value, so an accurate figure matters; see stamp duty on property transfers and land transfer process in Kenya, step by step. Understating the price to save duty is risky and can lead to penalties.

Valuation and tax on sale

When you sell, the gain is the price less the cost and allowable expenses. The value at purchase and sale, and the records that prove them, matter. Use the capital gains tax calculator and read selling a property: capital gains tax steps. Keep the sale agreement, the valuation and receipts for improvements.

Valuation and rent

If you let the property, the valuation influences your yield and rent expectations. How to set the right rent for your property and how to analyse a rental property investment before you buy explain how to test the numbers. The rental property investment analyser compares properties side by side.

How to read a report

Look at the date of valuation, the basis of value, the property description and the title details, the method used and the comparables. Check that the property described is the one you mean. Read any assumptions and limitations, such as "subject to a clean title". A report that cannot explain how it reached the figure deserves questions.

Why valuations differ

Two valuers can reach different numbers for the same property, especially in thin markets with few sales to compare. A bank valuation for lending is usually cautious, so it may be lower than the price you pay. Do not be surprised by a gap, but ask for the reasons, and consider a second opinion for a big purchase.

Keep the paperwork

Keep valuation reports with your property file for as long as you own the property and for the retention period after sale. They support your purchase price, your insurance and your tax position. A valuation is an opinion, not a guarantee, but a good one gives you a firm basis for decisions that involve a lot of money.