What is valuation?
According to the RAE, valuing has two meanings:
- Point out the price of something.
- Recognize, esteem, or appreciate the value or merit of someone or something
Consequently, valuation entails a subjective action since you are going to be the one who estimates, signals, recognizes or appreciates the value. Therefore, two different people, even if they are professional and very prepared appraisers, will not obtain the same exact valuation of a property, in our case, a real estate. It is practically impossible for two people to match in the same exact figure, with two decimal places, as a valuation should be delivered.
And what is value?
It is nothing other than the degree of usefulness or aptitude of things, to satisfy needs or provide well-being or delight. An obvious example is when a special large family, who lives in a very tight 3-bedroom apartment with several children in each of the secondary bedrooms, knows that the neighbor who adjoins them has decided to put his home for sale. For this family, that home for sale will have greater value than for other potential buyers. Hence the importance of publicizing the new attractions to the neighbors, because there could be people for whom that house has greater value, being willing to pay even a price higher than the market value.
And a new question arises:
What is market value?
It is the most likely price at which a property will be sold in a market characterized by a rational operation on the part of supply and demand. This necessarily implies:
- That buyer and seller act in their own economic interest.
- Let both be well informed and act prudently.
- That the property is exposed for a reasonable period in an open and transparent market.
- That there is no voluntary speculative action on the part of the seller.
In Spain, throughout Europe and in most developed countries, in a free market economic model like the one we have and in the so-called “information society”, these four characteristics are absolutely normalized.
An adequate real estate valuation
Once these general concepts have been understood, it is necessary to emphasize a detail of the title of this article: the adjective “adequate“. Because, indeed, it is not only about making a real estate valuation, but that it is appropriate. Here is the key vault, the point of difficulty, what separates us from success or what brings us inexorably closer to absolute failure. And only after seeing the property is it possible to start valuing it.
First we will have to sit down and reflect on what is the most accurate calculation method to obtain the value of the property we are studying. Thus, it will not be the same to calculate the market value of a renovated apartment in the center of Madrid, than the value of a leased industrial warehouse that is sold in profitability, or the value of a single-family home in a municipality on the outskirts of the capital built in 1970, and that begins to suffer from aging. Yes, because real estate also ages, of course. And the speed of aging of a house is not the same as that of an industrial warehouse.
The method that will occupy more than 90% of our valuations is the comparative method. This method or valuation system seeks to obtain value by comparison with goods of the same nature and similar characteristics, whose value and price is known. These comparable goods are those known as witnesses. Consequently, for a correct valuation it is necessary to have good witnesses that resemble the property under study. And the more similar they are, the better and more accurate our assessment will be.
To select these witnesses, it will first be necessary to establish what are the qualities and characteristics of the property object of valuation that influence its value. In order of greatest to least importance, we can say that they are:
- Location (from the general to the particular): city, district, neighborhood, block… even sidewalk. Everything can influence.
- Typology:an independent villa is not the same as a terraced house.
- Features:a 4 bedroom, 2 bathroom apartment is not the same as a 3-bedroom apartment; and whether it is renovated or not.
- Size: unit prices (€/m2) decrease as the surface area of the property increases, as it is due to a greater or lesser impact of the fixed costs involved in construction, among other reasons. Therefore, we must take into account the legal surface of the property under study.
- Orientation:homes facing north, being colder, tend to have lower demand.
- Distribution: passage or independent lounge; size of the rooms.
- Facilities:facilities that provide comfort, such as the elevator (in this specific case, its importance can oscillate, depending on the floor on which the property is located; a fourth floor floor is not the same as a ground floor apartment); or as home automation; or advanced alarm systems.
- Energy efficiency:a very efficient home, with energy rating A, consumes much less energy and emits lessCO2 emissions into the atmosphere than a house with energy rating G.
- Differential elements:self-locking blinds, ornamental elements, building cataloguing, etc.
Once this analysis of the property we are valuing has been carried out, it will be necessary to analyze the segment of the real estate market of comparables. And where will we do it? We’ll start with our own real estate exchange: REMAX and MLS. If there are no witnesses or they are not enough, we will look in real estate portals of recognized prestige. From among all of them, a representative sample of those corresponding to the comparable ones will be selected. And how much is a representativesample? Usually, 4 or 5 witnesses is necessary. If we have less than 4, the error may be greater.
When we have already selected these witnesses, we will have to apply the necessary homogenization procedure, which consists of applying a series of correction coefficients to the unit prices per m2 of the witnesses to adapt them to the characteristics of the property under study. At this point lies the magic… There is no script of how much a witness must be improved or worsened to accommodate the reality of the property under study. The best way to reduce and even deactivate the human error that arises from an incorrect homogenization is to weigh several characteristics, one for each property, so that we will end up generating many correction coefficients. Certainly, it can become tedious, although it is the right method.
At the end of applying coefficients, the unit prices of the controls will vary as a result of the result of the sum of these coefficients and the effect they produce when multiplied by the initial unit price. The corrected unit prices of the witnesses will lead to a resulting value that will be the arithmetic mean of them. And this resulting value will be the one that will have to be multiplied by the surface of the property, thus obtaining the market value of the property. With two decimal places is the right thing to do.
So far, great. But… and what is the area by which the weighted average unit price must be multiplied? Important question… There will be situations in which we find that the registration area coincides with the cadastral and even with the real one. But these will only happen in general in properties built from the year 2000, when the coordination between registration and cadastre began to regulate in the granting of the License of First Occupation of real estate developments from that date as a requirement for its obtaining. However, we will find a multitude of casuistries, from those where the registration area is substantially lower than that collected in the cadastre and the real one, to those where the new construction of the property is not even registered (generally, in single-family homes of private promotion). We can find ourselves with really complex situations, with excesses of space in plots, or with unreclared built surfaces that could be subject to sanctioning file or, on the contrary, perfectly legalizable. In these cases, it is very likely that the collaboration of an expert will be necessary, who will help us to provide light in the dark. Ignoring these cases, sometimes somewhat extreme but totally real, we will usually adopt the surface of the registry, including the proportional part of the common areas (portal, stairs and rests of the common elements) correspond to the house, as it happens in the properties that are in a collective building.
And what about the typical terraces that have been closed and added to the living room or a bedroom? Can it then be considered that now the house is larger, as surely the owner will argue, eager to get a better price? The answer is resounding: only if that surface had been legalized could it be computed as a 100% computable constructed area. And we must think that the probability of a landlord legalizing the closure of a terrace tends to zero. Because, among other reasons, it would be necessary to achieve the unanimity of the board of owners to modify the coefficients and the horizontal division, since having a larger constructed area would correspond to a greater share of participation in the common elements of the building. And all this assuming that the parameters of buildability of the building are not exhausted and the criteria dictated by the city council for the closure of the terraces are met. For a single moment, imagine the procedures that this entails. Certainly, it is almost entirely impossible apart from very expensive. Therefore, these areas can surely only be considered, at best, as an improvement.
And with the attics in which the space under cover is used until the inclined plane of the roof joins with the flooring? In general, in most municipalities, from 1.50 m high the surface is considered habitable. Conversely, below that height, any surface is uninhabitable. Therefore, if they offer us to market a “beautiful and coquettish attic of 15 m2 in the very center of Madrid, ideal for students, and for those who take advantage of watching TV while turning the steak sitting on the toilet, sleeping with their heads embedded inside the eaves“, let’s think that they are most likely pretending that we market a storage room, without a certificate of habitability, that is, that this surface is not intended to be inhabited and could only be used as a warehouse. Let’s think about our personal and corporate reputation… We have a responsibility.
I have less than 250 words left and I do not want to end without making an express mention of public or official housing.
These homes, their storage rooms and garages, as a result of their qualification as VPO / VPP,have a maximum sale value that is determined by unit prices commonly called“modules”that, multiplied by the useful surfaces – with some maximum limitations in garages and storage rooms – gives us the maximum sale value of that property. However, depending on which cases, it could be possible to disqualify early to the date on which the house would automatically be disqualified, so in those cases it could be appropriate to know the value of the house as if it were free, being able to earn a few thousand euros to an owner who, without a doubt, will appreciate our professionalism and commitment. In these cases, it is very important to have the help of a colleague expert in the field to guide us in the process if we do not know this area well. And, above all, to have the confidence of the owner, who signs the exclusive sale order from before even making the valuation, for the amount of procedures and procedures that must be done to know in depth the specific case.
And how to correctly present a real estate valuation?
In another article we will address this idea, where we will have to end up advising the owner of the best marketing value, which should not be the same as the market value …