When you buy a product, the following questions crop up: How much does it cost? What is its price? What is its value? These three questions are very similar. In the (real estate) economy, these three terms have different meanings. Costs refer to the consumption of goods and services for the production of a product, expressed in monetary units. The price is the sum of the production costs and any profit margin. Value is divided into the market value (objective value) and the utility (subjective value) of a product. Ideally, the market value of a product is the expected or estimated sales price at which it can be sold in a functioning market. The utility, on the other hand, corresponds to the subjective usefulness of that good for a person with regard to their set goals. This is usually not expressed in monetary terms and varies depending on the person.
Modern property valuation
The goal of modern property valuation is to estimate a property’s market value. This is based on the current market price under competitive conditions (supply and demand) with informed market participants. Depending on the definition, the market price is the highest achievable price or the price that is most likely obtainable within a useful period of time.
This may sound simple. But the question is: How is the market price determined? After all, no two properties are the same, and there is no central stock exchange on which properties are traded that could provide information on current transaction prices. It is therefore often essential to determine the market price, for example, from the combination of location, view, accessibility, architecture and age of the property. Depending on the type of use of the property, various valuation approaches have been developed in practice to determine the market price.
There are basically three methods for appraising a property: the comparative value method, which assumes that the willingness to pay is based on actual realized purchase prices of comparable properties; the income value method, which focuses on the utility of the property for the buyer; and the asset value method, which assumes that the price cannot exceed the building and land value or the cost of constructing a new (replacement) building. Investment properties are generally appraised using the income value method, while homeowners typically use the comparative value or asset value methods.