Home ownership Find the right market value via real estate valuation

Calculating the appropriate market value of a property is crucial. Learn about the important factors.

by UBS Insights 11 Oct 2021

How much is my house worth? You will ask yourself this question when you want to sell your property, if not before. Since the purchase or sale of real estate generally involves very large sums of money, it’s advisable to address the subject of real estate valuation early and with care. What’s more, the two parties – sellers on one side and buyers on the other – sometimes have widely differing ideas about the appropriate market value of a property. That’s why it’s usually advisable to call in a professional to help establish the purchase price.

Determining the appropriate market value of a property

A real estate valuation is a good reference point for establishing the subsequent purchase price. However, it’s not easy to calculate or estimate the market value of a property because no two properties are the same. Every property and every plot of land must be considered in its own right. In short, there is no such thing as the right price, and there are no simple price lists you can use to calculate it. The only solution is to assess the value of the property to reach a realistic estimated price that can be taken as a basis for sales negotiations. The aim of any real estate valuation is to determine market value.

The market value of a property is defined as the price that should be obtained for the property within twelve months under normal market conditions. Various factors are taken into account to determine the value of a single-family house or apartment. The location of the property is of vital importance. For example, buildings in peripheral, poorly developed regions are sometimes worth up to 40 percent less than comparable properties in central locations. Other factors that play a role in determining the market value of a property are the surface area or volume, year of construction, number of rooms and standard of finish, as well as the state and quality of the property, including interior fittings. Any restrictive provisions such as building rights or rights of first refusal must also be taken into account.

The market value of a property is also used in successions and by insurance companies. Last but not least, the market value plays a significant role when taking out a mortgage, as you can only borrow the market value determined by the bank, even if the purchase price is higher. In this case, the buyer must finance the difference between the purchase price and the market value with equity that does not come from the 2nd pillar (neither an advance withdrawal or a pledge).

Three valuation methods at a glance

Various methods are used to determine the market value of a property. The most common methods for real estate valuation are the hedonic method (also called the comparative value method), the capitalized income value method and the real value method.

  • Hedonic / comparative value method: The valuation of a property is based on the prices of actual transactions on the real estate market. Using statistical methods, a property is divided into its components (location, size, number of rooms, etc.). This makes it possible to determine the average purchase price paid for comparable properties. Banks and calculators available online usually rely on this method. Read more about the hedonic method.
  • Capitalized income value method: The capitalized income value is the rental value attainable for the property in the long term. This is particularly important when determining the value of investment properties (rented residential and commercial properties).
  • Real value method: The real value is comprised of the value as new – i.e. the cost of constructing the same building new, less age depreciation – and the value of the land. A reliable valuation of the building structure on site by an expert is required for this approach. The real value method is chosen mainly when there is not enough comparative data available for the hedonic method, such as for properties in remote areas, or for luxury and character properties.

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How sellers determine market value

Anyone who wants to determine the value of a house or apartment in order to calculate the potential purchase price can consult a real estate agent. But you should be aware that it’s not uncommon for them to quote excessively high prices in order to be entrusted with the sales mandate. An initial price indication can be obtained from online calculators that require the property owner to enter various data and ratings about the property before providing an estimate. The accuracy of this estimate depends partly on the tool used and the data registered, and partly on how objective the owner is when it comes to evaluating the characteristics of their property.

The best way to estimate the market value of a property as reliably as possible is to call in a professional who won’t profit directly from the sale. Anybody who is interested in doing so can contact an industry association – for example the Swiss association of real estate appraisers (SIV), the Homeowner Association (HEV) or the Swiss Real Estate Association (SVIT) – and select an experienced, reputable and independent professional to carry out the real estate valuation. Last but not least, assistance can also be provided by UBS client advisors.

 

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FAQ on real estate valuation

  • How much does a real estate valuation cost?
    A valuation by a certified specialist costs around CHF 1,000. The expense will quickly pay off, as the specialist will know the market and local conditions, inspect the property, evaluate any special features, and may even know prospective buyers.

  • How do I calculate the value of a property?
    The three most common valuation methods used to determine the market value of a property are the hedonic method (also known as the comparative value method), the capitalized income value method and the real value method.

  • Who can value a property?
    Online calculators can give an initial indication, but the most reliable information will be provided by specialists who are not directly involved in the sale.
  • How do banks value a property?
    Banks generally rely on the comparative value method, i.e. hedonic valuation. This involves comparing a property with thousands of other properties that have recently been sold.

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