The 67-year-old widow Monika Meier (name altered) has spent many years as a happy home owner. But now she has finally had enough. Fed up with gardening, climbing up and down stairs, keeping six rooms clean and regularly repairing the heating, she has decided to get rid of her home. But what is the property worth?
Do not economize on the valuation
If the owner gets the sales price wrong, she might scare off potential buyers. Should she advertise the 30-year-old house in need of renovation as a “charming character property” and go as high as possible with the price?
But if the price proves unattainable, she would have to bring it down, which comes across as unprofessional. Potential buyers would shamelessly take advantage and demand the next reduction straight away. Conversely, buyers are also suspicious of prices that are obviously too low. Is there something wrong with the house or the apartment? Is the owner under pressure? Economizing on the valuation, therefore, is the wrong kind of saving to make.
The crux of the valuation process is that no two properties are completely identical. Whether a property is in “good” or “very good” condition is also open to interpretation. Unlike stocks, property values cannot simply be obtained from a price list. Every estimate must take account of the location and numerous other characteristics.
Of course, the purpose of the valuation is also significant. A valuer working for an insurance company is interested in what it would cost to reconstruct a comparable building in the event of a loss. Within a community of heirs, a lower price for family members will be set, whereas a professional real estate agent might say: “I would have paid 50 percent more.”
Low interest rates = high valuations
If the building in question is an investment property, i.e. an apartment building or an apartment that is to be rented out, the rules are different. In such cases, the expert has to estimate the expected future rental income. Known as the income approach or the discounted cash flow method, this involves discounting the annual rental income with a certain interest rate to arrive at the present value. The lower the interest rate, the higher the value of the property. In the current low-interest-rate environment, in which most fixed-income investments generate hardly any returns, real estate valuations have risen sharply as a result.
“If we estimate an investment property at 1 million francs based on its real and earnings value, it is quite possible that someone will pay 1.5 million or even more for it,” says an experienced independent valuer from the Berne Homeowners’ Association. Patrick Schnorf of Wüest & Partner confirms that the prices paid in the current environment can differ from the estimates. The assumptions in the estimates should be tested repeatedly and compared with the actual transaction prices, he stresses.
The key valuation methods
Here is an overview of the various valuation methods which can be used.
- Market value. The market value is the average price for which a property of the same or a similar size and nature and in the same or a similar location can be sold in the region in question.
- Hedonic method. The hedonic method is based on the asking prices or effective transaction prices on the real estate market. This model requires certain data to be available. With the help of statistical methods, a property is broken down into its components (location, size, number of rooms) and valued on this basis. Banks generally rely on these models.
- Real value. The real value corresponds – in somewhat simplified terms – to the new value of the same house (less depreciation) and the value of the land.
- Income approach. The income approach values the property from the perspective of an investment whose value is based on the rental income that can be earned and the expected, risk-adjusted return.
- Taxable value. The taxable value is the value defined by the authorities on the basis of a schematic formula or an estimate of the property and wealth tax payable.
- Loan-to-value ratio. The loan-to-value ratio is the share of a property’s market value covered by a mortgage loan. The lowest value principle applies throughout Switzerland. This means that, if there is a difference between the purchase price and the bank’s estimate (calculated according to the hedonic method), the lower value is definitive for the financing.
- Rebuild cost. This is the value estimated by the insurance company which it would pay in the event of the building’s complete destruction (excluding the value of the land).
Monika Meier is lucky because it is currently a very good time to sell properties. However, to ensure that her price estimates are not too far off the mark, she should still have her house valued by a professional.
Five tips on valuing properties
1. Partiality. Many people who value and sell their own homes are driven more strongly by emotions than by facts. Potential buyers are more likely to see the home-made kitchen furniture or the DIY loft conversion as flaws than as something that gives the property character.
2. Location. Remote properties with poor transport connections are often worth 40 to 60 percent less than those in good, central locations. Location is the most important price driver.
3. Experts. To find a recognized valuer in your region, you should contact an industry association such as the Swiss Association of Real Estate Appraisers (SIV), the Swiss Real Estate Association (SVIT) or the Swiss Homeowners’ Association. Affiliation with a professional organization such as the SIV or the SVIT is an important criterion when choosing the valuer, as are references and qualifications (CAS Real Estate Valuation, MAS Real Estate Management Valuation, Swiss federal certificate).
4. Cost. Depending on the property and region, a valuation of an owner-occupied property by an expert costs between 800 and 1500 francs.
5. Real estate agents. Valuations by real estate agents are particularly inexpensive – in fact, they’re usually free. There’s a good reason for this: the purpose of the valuation is usually to obtain a sales mandate. Caution is therefore advisable in such situations.