It’s a sunny and peaceful afternoon and everything is quiet other than the birds twittering above the roofs of the neighborhood. Every so often, the bells of the Nydegg church ring out from the city below. The members of the Baumgartner (name altered) community of heirs look down over the Bern Minster from the balcony of the top apartment. The stunning view stretches from the Bernese Alps right across to the old city center and the loop of the river Aare – a UNESCO World Heritage Site since 1983. The heirs are visiting the property together with a valuer who is well known throughout the city of Bern.
A gem of a property for architecture lovers
This is already their third official appointment aiming to provide them with an estimate of the property’s market value. One valuer believes it could be worth 910,000 francs, the other gives it a value of 1.3 million and the third claims that is worth 1.4 million.
All of the experts and an independent architect immediately realize that major investments are required: the three-family dwelling needs to be fully renovated from the heating system right up to the roof. Nevertheless, an independent architect also recognizes the property’s historic qualities, namely its valuable and irreplaceable craftsmanship in the form of artistic pieces of stone masonry, original doors, railings and window shutters, all of historic value. The 100-year-old building offers a number of attractive features: a peaceful garden, a large garage and an attic that can be easily renovated and extended. On top of all this, it also boasts another even more impressive highlight: its location. The property is situated just a short walk away from the old center of the Zähringer city and the central station and Federal Palace are also close by.
According to Rudolph Schweizer, the Managing Director of the real estate company of the same name in Bern: “One of the most frequent mistakes made by communities of heirs is to confuse the market values provided by experts with a potential sales price.” The market value of a property is calculated based on the average of its real and earnings value.
As Schweizer emphasizes, value and price, however, are not the same thing. The sales price ultimately depends on the result of the selling efforts and negotiations. “The sales price is a compromise between the buyer and the seller,” explains Schweizer.
Selling for twice the price
In the case of properties in desirable locations, the prices that can be achieved on the market are sometimes double the amount estimated or more. Even Rudolph Schweizer was surprised when he recently dealt with the sale of a very modest little terraced house, which he expected to have a market value of a good 600,000 francs. When it was actually put on the market, however, the property achieved an impressive price of 1.3 million francs. The experienced real estate expert from Bonn believes that extremely favorable financing options and a lack of investment alternatives are currently driving the real estate boom.
Thomas Moser from Walde & Partner in Zurich comes to a similar conclusion, stating that communities of heirs currently represent the largest group of sellers in the case of small multi-family houses and investment properties. He also claims that there is noticeable uncertainty among these sellers when it comes to prices: “Some communities of heirs even commission as many as three or four valuation experts but still end up no wiser than before.”
Thomas Moser believes that two fundamental questions need to be asked when making a valuation, namely: Who could be a potential buyer? What could their motives be? If the property will mainly be used as a capital investment, the valuation should be based on the earnings value. The value then very much depends on the expected rental income, an assumed interest rate and the buyer’s expected returns.
The motives are different if the buyer plans to use the property themselves. Buyers are above all likely to be willing to pay a high amount for a property if it boasts an extremely desirable location and they very much want to live there themselves. In such cases, a serious potential buyer is less influenced by the earnings value of the property and more interested in how much they are willing to pay for each square meter of their desired quality of life. An initial conclusion can therefore be drawn, namely that when valuing properties, there is no “golden rule” that can always be objectively justified and never fails to lead to the “right” figure.
The mantra of the experts: location, location, location
Real estate appraisers therefore need to have excellent knowledge of the local market and be aware of which locations attract the attention of specific buyers. Properties need to be located in a place that grabs the interest of wealthy private individuals. This is not, however, always the case. There are certain commonly seen properties that are unable to meet these requirements. “A run-of-the-mill apartment block dating back to the 1970s and located in an urban area virtually never attracts fancy prices,” explains Thomas Moser.
The general rule of thumb is that the location of a property often accounts for as much as around 40 to 50 percent of its value. In locations offering magnificent views by Lake Zurich or Lake Geneva, the land itself is actually worth more than properties in more average or remote residential locations. Other important factors that influence the price of a property include its size and/or number of rooms. Elements such as the property’s structural condition, any possible need for renovation and the quality of its interior fittings also all play a role.
An in-depth examination of the property is needed in order to evaluate all of these aspects. While normal standard properties can now be extremely reliably valued using standardized procedures, luxury or special properties require an extensive assessment.
A valuation report produced by an expert above all needs to consider the following factors:
- Local market conditions and demand
- Location, surroundings, pollution
- Condition of the property
- Land area, reserves, densification potential
- Zoning regulations and entries in the register of real estate
Alongside these aspects, the valuation also needs to factor in changing conditions. The generally low interest rates currently available have resulted in a significant decrease in buyers’ ROI requirements when it comes to properties bought for investment purposes. Real estate appraisers need to incorporate this trend into their valuations because the extent at which returns are decreasing corresponds with the extent at which the values of real estate as an investment object are increasing.
Leave it to the experts
According to Dr. David Hersberger, President of the Swiss Real Estate Association (SVIT), an expert’s report does not need to correspond to the highest possible offer made by an interested party in the current dried-up market. “A report focusing on transaction prices in individual cases would not be valid on a long-term basis,” he explains. If this one interested party willing to pay a top price pulls out of the running, the second highest offer is often much lower. The buyer and the new owner therefore no have guarantee of receiving another offer of a similar amount again. David Hersberger comes to the same conclusion as Rudolph Schweizer: value and price are not the same thing.
Several days after their meeting with the third expert, the Baumgartner community of heirs again heard from a number of interested parties, some from the district and some from the city. One of these potential buyers offered 1.5 million francs; the other offered 2 million. The community of heirs have now learnt their lesson: an isolated figure in an expert’s report gives them very little to go by. They need expert advice and interpretations in order to identify correlations and correctly interpret a valuation. If they really want to find out the maximum possible market price, they have to put the property up for sale on the public market.