“The true value of an object is the price someone is willing to pay”
– Nightcrawler (Film) –
If you own one or more properties in Spain or in another part of the world, I ask you, do you know the real value of each of them at this time?
The importance of the price of real estate is so great that I do not understand how some people can value their property with the following explanation, you will not believe it:
“I sell it for €1,200,000, I pay my debts, I buy a flat for €250,000 and I invest €100,000 in my business, I won’t sell it for less”
When I heard it, I replied naively: “Really?”
Yes, it is important to have an idea of the project we have to invest our capital once the property is sold, I understand that and I agree, but we cannot value a property based on our dreams. The only way to value it is in the market, after all it is just one more price. Let’s say it’s about the basic law of supply and demand to be simpler.
The Price Spectrum
Real estate transactions occur over a narrow price spectrum. Yes, it is possible to get a price on the upper edge of the market value and earn more from the sale, if you are a seller you are interested in targeting this area. It is also possible to obtain a price at the lower edge of the market value range and earn more with the purchase, if you are going to buy you are interested in doing so in this range of the spectrum. This quote from Warren Buffett clearly illustrates it:
“Never be afraid to ask too much when you sell, or offer too little when you buy.”
– Warren Buffett –
But beware, in the real estate world this is done in this price spectrum. A 5-8% overvalued property will only be sold in extraordinary situations. On the other hand, those properties that are 5-8% undervalued will be sold very quickly, they will not last long on the market. Come on, you will not get these products in real estate portals such as idealista or fotocasa.
Price variation over time
In our own experience, 75% of homeowners do not know the real market value of their properties, at most an estimate with a large margin of error. This happens for multiple reasons, but the clearest is that real estate assets vary in price over time and people are not in the habit of valuing them because it costs time and money to do so.
If you want us to determine the value of your property at this time for free, click on the following link, if you want to do it yourself, keep reading.
How to determine the real value of my property?
As you will see in this article, calculating the real value of a property is not an easy task, but if you have order and learn to handle the following methods or if you have trusted professionals, you will be able to determine the value of your properties at any given time.
There are basically two branches of real estate: buildings or land and land. As you can see according to Rey-Carmona y Núñez-Tabales (2017), the methods that exist to value them can be classified into:
|Artificial Intelligence, and others|
Source: From elaboration with Rey-Carmona y Núñez-Tabales (2017)
The technical or traditional methods that are legally applicable in Spain are listed in the Official State Gazette (BOE-A-2003-7253) are:
|Traditional Method||BOE’s article|
|Cost||20 to 23|
|Comparison||17 to 19|
|Income update||23 to 33|
|Residual||34 to 42|
Source: From us
Each method can be applied as long as certain requirements are met. In the articles that I refer you to from the BOE you can get them quickly.
If you are a residential real estate investor, the comparison method is probably the only one you have used. If you have used any other we congratulate you. If not, I invite you to try another such as rent update. Let us now look at the traditional methods in detail.
The Comparison Method
The comparison method is the most intuitive of all and is easy to apply. The problem is that the method requires real information in order to be used correctly and non-professional owners generally do not have access to as much quality information because they are not dedicated to analyzing the market every day.
Six comparable properties are used, but in practice it is possible to do with more. These properties are called witnesses and are compared considering the individual characteristics of each one. In the case of houses, orientation, age, surface, conservation, lighting, height of the house, among other elements, are usually compared.
Each of these characteristics can be compared in three ways between properties:
- worse (mathematically this characteristic will be reflected as less than 1).
- same (= 1).
- better ( > 1).
For example, suppose you want to compare two exactly the same properties, located in the same building that have an elevator, and their only difference is that one is on the first floor and the other is on the fourth floor. The fourth floor will have a higher value than the first as it has more light and tranquility. This will be reflected with those characteristics having a value greater than 1 in the comparison.
The % that is worth more will be the one that the “eye” of the evaluator considers.
Finally, the arithmetic mean of the set of values obtained for each property will be calculated. This average will be the unit value (€/m2) that we will use to determine the appraised value.
As you can see, it is a process in which the evaluator’s criteria is fundamental. As if it were an engineering project, we recommend weighing the parameters between at least 2 people who know the market. This way you make sure that the value obtained will be attached to reality.
In order not to make the article longer, I will tell you a little about the other 3 methods so that you can have a closer idea of what they are:
The Cost Method
The cost method seeks to determine the Net Replacement Value (NRV). First we must determine the Gross Replacement Value (VRB) and we will subtract the physical and functional depreciation of the property.
The Gross Replacement Value (VRB) of a property is the sum of the investments that would be necessary to build another property with the same characteristics in the present. Keep in mind that technology advances with construction methods. Included in this value are:
a) The value of the land on which the property is located.
b) The cost of the construction, which includes: material for the work, general expenses, and the industrial benefit of the builder.
c) The expenses necessary to carry out the replacement. Among others, the following will be included: non-recoverable taxes and tariffs necessary for the formalization of the New Construction Declaration of the property. Licensing costs and construction fees.
In developed countries such as the United States or many European Union countries, this is a true estimate and can be obtained accurately.
The income update method. Also known as cash flow discounting
The updating method seeks to determine the value of the property based on its ability to produce income, so it considers the property as if it were an investment, that is, a pure and simple asset. To determine its value, we will need to establish the required return on the property (in our opinion it ranges between 4% and 8%, although it may be less or more depending on the situation), as well as how to know all the income and expenses expected from the property.
In our Free e-book, you can see the details of how to calculate the profitability of a property. To determine the price according to the rent update method, it will suffice to change the variable, that is, in the same equation, we establish the required return and calculate the price.
SIf you want us to value your property for free using the comparison method, the rent update method and the advanced methods, click here and we will gladly prepare a report with all the results.
We continue with the last method to comment:
The Residual Method
The residuals method is used when the comparison method cannot be used. It is the most widely used in land and land urban valuation, it is also frequently used on buildings to be rehabilitated. Similar to the cost method, it calculates the value of the property with the construction completed and subtracts the expenses that must be incurred for the property to reach that state.
Our objective: to determine the unit value to know the value of the property
All the valuation methods that we have just seen have in common that they seek to determine the unit value of the property (€/m2), that is, how much each square meter of said property is worth. Because all this will be summed up in a simple multiplication:
Value of the property (€) = unit value of the property (€/m2) x size of the property (m2)
It will be useless to dedicate time and effort to calculate the unit value if we do not have an exact value of the size of the property. In that sense, we recommend you consider the actual square meters.
Don’t make this common mistake!
It is a mistake not to apply the methods rigorously. A clear sample: if you use the data from the real estate portals to compare, you will have overvalued the property between 15% and 30% because the properties published on the internet do not reflect the real value of the properties that have been bought or sold.
Ideas to help you
Look for a local real estate agency in the area where you want to do the valuation and consult about the operations that have been closed in the last 3 months.
Contact other of similar properties sellers who have had their ad published on the internet for a long time, it may be that you get the good surprise that the person you call has already sold the property and tells you what price he sold it for and what other characteristics it had .
Contact a real estate agency like us that has the most advanced technological tools on the market that allow us to determine the value of a property anywhere in Madrid.
You can also use advanced tools that some companies use to value your property immediately, such aso Precioviviendas. But remember they still get approximate results.
Can I value my property or do I consult a professional?
Imagine that the air conditioning in your house breaks down. You can do two things: inform yourself, watch youtube videos or take a refrigeration course, practice and maybe repair it, it will depend on many factors. But the most efficient thing will be to go to a professional to repair it. Of course, he will charge you for his services, but you will surely have to spend much less time than doing it on your own and he will do it better.
With the real estate sector, as in any professional sector, the same thing happens. You can seek to do it yourself, but it will come at a cost, one way or another, of time, money, resources. You will know more than anyone if it will compensate you or not.
Remember that time is a valuable resource and experienced investors know this very well.
How can a leading Real Estate Agency in using technology like Geräh Real Estate Partners help me?
If you have reached this point, I want to thank you for having read all the information that we will gladly prepare to help you. Now you have to know one thing, all these methods are constantly evolving, specifically in the way information is obtained.
Today in Spain hundreds of real estate transactions take place every day, both for sale and for rent. This massive and constant production of information is part of what we call Big Data. Recently, this phenomenon has been studied through advances in Artificial Intelligence, giving fabulous results and providing much-needed information to analyze the value of any property. These are advanced methods and leading Agencies like ours use them to help us prepare rigorous real estate valuation reports. For this we combine our tools and knowledge of traditional methods with the support of the information provided by advanced methods.
In a nutshell, our valuation report will tell you the following:
- Exact property value, obtained by direct comparison of the curent market. We include valuation by comparison, by updating rents and by advanced methods.
- Price spectrum in which it is possible to close the property both upwards and downwards depending on the market.
- Historical analysis of the property price and future prediction.
We hope that all the information that we have shared with you is of use to you and if you need it, we are here to help you assess it for free.