Introduction to Real Estate Valuation
A real estate valuation aims to discern the economic value of a property, commonly constituted by land and building or real estate.
The own elements and those that can affect their value are analyzed, such as the constructive and qualitative parameters of the building as well as the location and the elements that characterize the area in which the property is located.
All this valuation process, whether we are Real Estate Agents or Real Estate Judicial Experts, must be carried out by adapting our work to Order ECO/805/2003 published in the Official State Gazette.
Which differentiates 4 methods of real estate valuation and difference between market value (the value at a moment in time) and mortgage value (the sustainable value over time).
The most important thing in the valuation is to be clear about the object of the same since we will not use the same techniques if, for example, it is to give a value of sale or a fiscal or expropriatory value.
Property Valuation Methods
Below we will explain the Main Real Estate Valuation Methods and all the elements that we must consider in each case.
1. Method of comparison of market samples:
This method calculates a value that will be called the market value by comparison.
Market or commercial value of a property (VM) is the price at which the property could be sold, by means of a private contract between a voluntary seller and an independent buyer on the date of the appraisal in the event that the property had been offered publicly on the Sydney Property Valuation market, that market conditions allowed it to be disposed of in an orderly manner and that a normal period was available, taking into account the nature of the property, to negotiate the sale.
For this purpose, the following shall be considered:
a) That there must be no prior relationship between seller and buyer, and that neither of them has a personal or professional interest in the transaction outside the cause of the contract.
b) That the public offer to the market entails both the realization of a commercialization appropriate to the type of good in question, and the absence of privileged information in any of the intervening parties.
c) That the price of the property is consistent with the aforementioned public offer and that it reflects in a reasonable estimate the (most likely) price that would be obtained in the market conditions existing on the date of the appraisal.
d) Taxes will not be included in the price. Marketing costs will also not be included.
2. Replacement cost method:
This method calculates a technical value that will be called the replacement value. That value may be gross or net.
To calculate the gross replacement value, the following investments will be added:
- The value of the land on which the element of building, building or building to be rehabilitated is located.
- The cost of the building or rehabilitation works: the sum of the costs of material execution of the work, its general expenses, if any, and the industrial benefit of the builder.
- The expenses necessary to carry out the replacement:The non-recoverable taxes and tariffs necessary for the formalization of the declaration of new construction of the property. It is also necessary to consider the technical fees for projects and management of the works or other necessary, the costs of licenses and construction fees, the amount of the premiums of the compulsory insurance of the building and of the fees of the technical inspection to calculate these premiums, expenses of administration of the promoter.The benefit of the promoter, nor any kind of financial or marketing expenses, will not be considered as necessary expenses.
To calculate the net replacement value, the physical and functional depreciation of the completed building shall be subtracted from the gross replacement value.
3. Residual method:
Using this method, a technical value is calculated that will be called the residual value.
Depending on the analysis of investments with expected values or with current values of dynamic or static denomination:
- The dynamic method is the one indicated to assess: urban or developable land, whether or not built, buildings in project, construction or rehabilitation, even in the event that the works are paralyzed.
- The static method can only be applied to plots and buildings in rehabilitation in which the construction or rehabilitation can begin within a period not exceeding one year, as well as to the built plots.
This method requires adequate information to determine the most likely real estate development to be developed under the applicable urban planning regime or, in the case of land with finished buildings, to check whether it complies with that regime.
Also sufficient information on construction costs, necessary promotion costs, financial costs, where appropriate, and marketing costs to allow estimating the normal costs and expenses for an average type developer and for a promotion of similar characteristics; market information enabling the sale prices of the elements included in the promotion or in the building to be calculated on the dates scheduled for their marketing; information on the performance of similar promotions.
4. Method of updating income:
This method calculates a technical value that will be called the market value per update.
The method of updating income shall be applicable, provided that:
- There is a representative rental or rental market.
- The property is rented or produces or may produce income as a property linked to an economic exploitation for which there must be accounting data of the exploitation or average structural ratios of the branch of activity.
The calculation of the update value shall require:
- Estimate cash flows (real estate or operational).
- Estimate the reversal value.
- Choose the type of update.
- Apply the calculation formula.
Cash flows will be estimated taking into account the regime of the property being valued and, in any case, the most likely assumptions will be used to determine their amounts and the dates on which collections and payments will be made.
The cash flows of the property subject to valuation will be estimated, throughout the useful life of the property or the operation, taking into account all the factors that may affect its amount and its effective obtaining, including: The charges that are normally obtained in comparable properties, the current occupation and the probability of future occupation of the property, the legal provisions or contractual clauses (rent, revisions, term, etc.) that exclusively affect the cash flows of the property, the current or foreseeable delinquency of the collections.
- In the case of rented properties, during the period of validity of the lease contracts the amounts of the collections that are part of the cash flows will be those derived from the contractual clauses, if these amounts are higher than those of other comparable properties, they can only be used if it is considered and justified that the modification of said amounts is not foreseeable.
- In the case of real estate linked to an economic activity, the flows will be the average amounts, corrected in a reasoned way, of the sector of activity in which said exploitation is integrated.
The calculation of the payments will include any type of current or foreseeable necessary expense, even recoverable, that the property must bear, whether directly attributable to the property (maintenance, maintenance, administration, taxes, fees, etc.), either as a result of its destination or necessary for its rental (rental management, marketing, etc.).
Recoverable payments shall also take into account the foreseeable period within which they are actually to be recovered.
As the last flow, the reversal value will be considered.
The discount value of the property being valued will be the present value (VA) of the expected cash flows and reversal value for the type of update chosen.