You want to sell your house and to do this you want to know how much it is worth. Since the subject of real estate valuation is extremely complex and different valuation methods are used depending on what type of property it is, ask yourself the following questions:
How do you find your way through the jungle of evaluation methods and offers? How is the market value of something as unique as a property determined when no two properties are the same and therefore not actually comparable? And anyway: What is the difference between market value and market price?
Why is a property valued?
A real estate valuation is used to determine the value of a property. Why this should happen can be due to many other reasons in addition to the most common reason – namely the planned sale of a property: Maybe you want to make regular estimates to monitor the development of the value of your own property, but in the course of a divorce you need to know the exact value of the joint property Determine home ownership, or comes through an inheritance to a property that now needs to be valued.
No matter what the reasons for a property valuation are: the goal is always to estimate the market value or market value. These two terms can be used interchangeably. Depending on the definition, the market price corresponds to the highest or most likely price that can be achieved within a reasonable period of time. But be careful: value and price are not the same thing: the aim of the market or market value is to approximate the price that can be achieved on the market. The (market) price, on the other hand, is the result of negotiations between the seller and the buyer.
Property valuation: the 3 most well-known methods
There is no central exchange on which real estate is traded and on which its value is determined. So how do you determine the market value of real estate, considering that no two properties are the same?
To remedy the problem, various assessment methods have been developed. They all take different types of real estate into account and focus on different areas. The most common valuation methods in Switzerland are the hedonic method (comparative value method), the income method and the tangible value method.
Hedonic method (comparative value method)
With the hedonic method, a property is compared with thousands of traded properties and the price that comparable properties in a comparable location have achieved in the past few months is statistically determined. The price-determining properties of properties such as location, standard of construction, construction quality, etc. are compared. Due to the initial situation that each feature of a property makes up a certain portion of the total price, these individual features of a property are recorded and compared in a database with thousands of properties that have recently changed hands.
The hedonic method was introduced in Switzerland by IAZI AG almost 30 years ago and has become increasingly important in recent years. One of the biggest advantages of this method is that the influence of the individual characteristics on the price is not determined by one person, but by a mass of buyers and sellers – i.e. the market. If all information about the property to be valued is available, a valuation can be carried out very quickly. The hedonic rating is particularly suitable for single-family homes and condominiums.
When it comes to granting mortgages, banks usually rely on the hedonically determined value of a property. It is time-efficient and, in contrast to other methods, cheaper.
Income value method
With the income method, the focus is on the value in use – i.e. the cash flows – of the property for the buying party. The income value method is often used for investment properties such as apartment buildings, office and commercial properties. The aim is to quantify the amount that can be earned on the profit. The income value is determined by estimating future income and deducting any costs incurred for management and interest. According to IAZI AG, banks and smaller real estate investors in particular value property using the income method, as this valuation can be carried out in a relatively short amount of time.
Based on the sustainable returns and costs, buyers of investment properties then decide whether they want to make the investment. The better the cost-income ratio, the higher the earnings value. The lower the capitalization rate (ratio with which the income value is calculated from the rental value), the higher the value of a property.
Tangible value method (real value method)
In contrast to the income method, this method does not focus on what is expected, but rather on what already exists. The material value method, also known as the real or intrinsic value method, determines the value of a property not based on the future earnings that can be achieved, but rather based on the production or replacement costs. The intrinsic value of a property results from the calculated construction value of the building plus the preparatory and environmental work necessary for its construction as well as additional construction costs and the land value. If necessary, wear and tear on the property is taken into account.
In principle, the material value can be determined for all properties; However, since the focus is not on the income but rather on the substance of the building, the use of this method is particularly suitable for properties that do not generate any income; for example historical buildings or owner-occupied properties, but also for commercial, industrial and special properties.
Do subjective factors play a role in the evaluation?
In the past, real estate appraisals were carried out exclusively by experts – for example architects. This method is still used in practice today, but has largely been replaced by other assessment methods. In addition to the fact that expert estimates are very expensive, this is also due to the fact that the value of a property is only determined based on the opinion of one individual. It is therefore difficult to avoid a certain degree of subjectivity, as assessments can vary greatly depending on the estimator's preferences. Today, banks often charge more than expert estimates for lending in order to avoid exactly this.
There is no exchange of hands without emotions
One of the most important subjective factors are the emotions of the buyers and sellers: buying or selling a property is always associated with great emotions and is difficult to determine objectively, especially for the people directly involved. The ideal value of one's own four walls is often valued much higher than the actual value would correspond to, and this presents real estate agents who are dealing with the brokerage of a property with the great challenge of setting a realistic price. Even though price reductions are a common process for adjusting the sales price to the market value, they have their pitfalls: an object that is already known on the market and has not found a buyer and is repeatedly reduced in price can quickly appear unattractive.
The selling price always depends on various factors and – like everything – is dominated by supply and demand. For an exclusive luxury property that, for example, has only a few potential buyers, other factors are also crucial than just an evaluation: Here, for example, sales circumstances such as the urgency, the willingness of the interested parties to pay and, last but not least, the course of the price negotiations play a key role Role.
Can reviews always be relied upon?
Real estate valuations normally play a central role in the market: they are crucial for pricing and simplify the interaction between supply and demand. As long as the real estate market is in balance, it works brilliantly. As soon as the market situation changes massively – for example in boom or crisis episodes – real estate valuations lose their groundbreaking function and effect. The prices actually paid are completely disconnected from the determined market values and have no realistic basis; This happens, for example, during a real estate bubble. Real estate prices always adapt very quickly to new situations, but valuations always lag somewhat behind reality.
So what is most important to consider?
There is a lot of half-knowledge and uncertainty surrounding real estate valuation – in order to decide on the right method, it is necessary to get detailed information. Carrying out an estimate on a regular basis helps to monitor the performance of a property and thus also to recognize changes in the market.
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