Home ownership Valuation of real estate

Different factors need to be considered when assessing the value of a property and determining the purchase price.

by Felix Hauser 27 Sep 2016

How much is my house worth? This question needs to be asked at the latest when your house is put up for sale. It is important to be well informed about the issue of real estate valuation; after all, a lot of money is involved in the purchase or sale of real estate. And there can be a very large gap between what buyers and sellers regard as the “right” price. In many cases it makes sense to obtain the help of a specialist in determining the purchase price.

Is it possible to determine the “right” price for real estate?

An appraisal or valuation of real estate provides the initial guideline for what the later purchase price will be. It is not easy, however, to calculate or estimate the value of real estate. The price cannot be read from a price list. Instead, it must be determined based on a variety of specific criteria. Moreover, no two properties are the same. Each home and each plot of land must be assessed individually. In short, there is no “right” price. The value of real estate can only be estimated. Various models/approaches are used for estimating and assessing the value of real estate. But these models can lead to different results.

Appraisal values for real estate

  • Market value (market price): The market value is the price that has the potential to be realized on the market. It is the average value at which similar properties in the same location can be sold. The hedonic evaluation method is often used for assessing the market value of an apartment or detached house, which is based on the market prices actually paid for comparable homes and apartments.
  • Loan value: The loan-to-value ratio is the portion of the value of the property up to which the bank will provide a mortgage.
  • Real value: The real value consists of the new value (construction costs that would apply for constructing the same building again, less depreciation) and the value of the land.
  • Earnings value: The earnings value is the rental value of a property over the long term. The earnings value is especially important for assessing the value of investment income property.
  • Tax value: The value that the tax authorities use for determining property and wealth taxes.
  • Insurance value: The amount estimated by insurance companies as to how much they would pay if the property were completely destroyed (not including the land).

The individual value also plays a role

When professionals attempt to set the value and price of a home, they try to do so using objective valuation points. But when the purchase price is set, the subjective value of the buyer must also be considered, as well as the plans that the buyer has for the future property. So, for example, an individual who wants to buy an older property and live in it in its current condition will not be prepared to pay the same price as someone who wants to convert the house into rental units.

How is the value of a detached house or condominium determined?

Various factors have to be taken into consideration when valuing a condominium or detached house. One key factor is the location. For example, buildings in peripheral regions with poor transport connections can be worth 40 to 50 percent less than comparable properties in central locations. Other factors that also play a role in the valuation of real estate include the area and volume, year of construction, number of rooms and the standard, condition and quality of the interior fittings. Other issues to take into consideration are any backlog in building maintenance and restrictive conditions, such as rights of first refusal and building codes.

What possibilities does the seller have to determine the selling price?

One way to determine the value of a house or condominium for the purpose of fixing a selling price is with the help of a real estate agent. However, caution is called for. Some real estate agents quote prices that are far too optimistic because they want to be hired to sell the property. Another option is an online estimate, which sometimes owners can do themselves. Again, however, one needs to be cautious. A valuation of real estate by the owner is frequently unrealistic, as owners are inclined to give more positive weight to the qualities of their home than an independent expert would. In order to reasonably estimate the market value of a condominium or detached house, an expert should get involved. Assistance can be obtained from an industry association, such as the Swiss Association of Real Estate Appraisers (SIV), the Swiss Real Estate Association (SVIT) or the homeowners association HEV Schweiz, which can provide an experienced, serious, independent expert to appraise the property.