The Art of Real Estate Appraisal: A Comprehensive Guide

Rudolphe ABENRudolphe ABEN - NEXTIMMO.LU

Rudolphe ABEN

The Art of Real Estate Appraisal: A Comprehensive Guide

As a real estate agent, you may have heard that the biggest challenge is dealing with differences of opinion on the value of a property. Between the seller, the buyer and the banker who sends an appraiser, opinions can be varied and sometimes contradictory. In addition, the price quoted by a real estate agent can be seen as an indicator of his or her competence - the higher the price quoted, the lower the presumed competence. Thus, real estate appraisal can quickly become a tricky exercise.

Understanding the Seller

Before diving into the technical details of the appraisal, it is essential to understand the seller's situation. It is important to make sure that the seller is truly motivated to sell and is not just trying to test the market. To do this, the agent can ask several questions: Why do you want to sell/move? When do you want to have moved/sold? What are the consequences for you if you don't sell? How much do you think your home is worth? Are there any liens on the property? Have you contacted other agencies?

Real Estate Appraisal Methods

Once you have a good understanding of the seller's point of view, it is time to dive into the valuation of the property. There are several methods that can be used, including:

  1. Direct or Indirect Comparison (by income): This method involves comparing the property to other similar properties that have recently been sold or leased.
  2. Market Value: This is the price a buyer would be willing to pay on the open market.
  3. Mortgage Value: This is the value of the property to a bank, often used to determine how much they would be willing to lend to purchase the property.
  4. Opportunity to buy or sell: This method takes into account current market conditions and opportunities.
  5. Convenience Price: This is the price that would be accepted and paid by someone with a specific need.
  6. Fair Value: This is the price that the asset could reasonably command in the market at a given time.

Criteria for Determining the Value of an Asset

When it comes to determining the value of a property, three factors are of primary importance: location, surface area and standing. Each of these factors is important, but they are often interdependent. For example, a large space in a prime location with a high standard of living will obviously be valued higher than the same space in a less desirable location or with a lower standard of living.

Calculation Example

Let's assume that we have a 200m² house in a residential area with a high standard of living. The average price per sqm ² in this neighborhood is 3000€. By comparison, the value of this house would be 200m² * 3000€/m² = 600,000€. The value of the land can be determined by its price per acre or by its surface. A building lot will always be worth more than a "built" lot. For example, if a building lot is worth 100,000€ and is 75% built, the value of the lot would be 75,000€.

The buildings on the land can be valued in three ways: by the built volume (m³), by the useful surface (m²), or by a comparison method based on potential income. If the property is rented, the monthly rent can be estimated and multiplied by 12 to obtain the annual rent. This rent is then used to estimate the value of the property. For example, if the monthly rent is $1000, the annual rent would be $12,000. Using a rate of return of 5% (which is generally accepted by the rent board), the value of the property would be 12,000€ / 0.05 = 240,000€.

Finally, the three valuations (comparison value, land value, and income-based value) are averaged to obtain an average value. For example, if these values are respectively 600,000€, 75,000€, and 240,000€, the average value would be (600,000€ + 75,000€ + 240,000€) / 3 = 305,000€.

This average value should be used as a basis for pricing the property. However, it is important to note that this valuation needs to be refined based on additional factors, such as market conditions, the unique characteristics of the property, and the specific needs of the seller and buyer.

In conclusion, real estate appraisal is a complex task that requires a thorough knowledge of the market, the property, and the various factors that can influence the value of a property. However, with the right methods and a balanced approach, you can successfully value a property accurately and fairly.