Valuation methods for house & apartment

The property type determines the valuation method used to determine the market value. There are various standardized valuation methods for determining the market value of properties.

Comparison of valuation methods: quick overview

As a rule, at least 2 of these procedures are calculated simultaneously:

1. Comparative value method
2. Income capitalization approach
3. Asset value method
4. Residual procedure
5. Determination of mortgage lending value

Comparative value method for undeveloped properties & ETWs

What does the comparative value method mean?

In the comparative value method, we simply look at what similar properties or properties nearby have sold for and use these prices as a reference to determine the value of a property.

It’s like saying, “This property is similar to the ones that have sold recently, so it will probably have a similar price.”

This valuation method is based on a comparison of sales prices of similar properties or apartments in the surrounding area. Various factors are taken into account, such as the size of the property, the location, the local infrastructure and other features that can influence the value of the property. By comparing with similar transactions, real estate valuers can make a realistic estimate of the current market value.

Explained quickly and simply:

• Determination of the land value by comparison with similar properties / real estate
• Based on the idea that similar properties achieve similar prices

Read more about the:

• Comparative value method

Income capitalization approach for rented properties

What does the income capitalization approach mean?

In the income capitalization approach, we estimate the value of a property based on the rental income it can generate. If a property has high rental income or has the potential to generate it, its value is estimated higher. It’s like looking into the future to see how profitable the property could be.

This method focuses on the potential income that the property can generate. For this purpose, the current or expected rental income is used and converted into a capital value using a capitalization factor. This capital value forms the basis for the valuation of the property. In addition to rental income, other factors are also taken into account, such as operating costs, tenant turnover, any vacancy periods and possible future developments in the market environment. The income capitalization approach thus enables a sound assessment of the long-term economic potential of a rented property.

Explained quickly and simply:

• Capitalization of the income generated
• Main method for the valuation of rented properties, land and companies
• Focus on potential future income from the property

Read more about the:

• Income capitalization approach

Material value method for single-family houses and apartments

What does the asset value method mean?

The asset value method looks at how much it would cost to build a new property today. It then deducts how much the property has lost in value in the meantime because it has become older. It is mainly used for houses and apartments to determine their pure material value.

In this method, the asset value of the property is determined on the basis of the production costs or new construction costs. These costs are adjusted for reductions in value due to ageing and wear and tear. Special features or structural characteristics can also be included in the valuation. The asset value method is particularly suitable for properties whose value is defined less by their earning power and more by their material substance.

Explained quickly and simply:

• Determination of the asset value by deducting the wear and tear value from the new construction costs
• Mainly used for single-family homes and condominiums
• Focuses on physical characteristics and reconstruction costs of the property

Read more about the:

• Asset value method

Residual method: Determination of the maximum investable amount

What is the residual method, simply explained?

The residual method is like looking at the money an investor has left over after deducting all costs. It helps determine the maximum amount an investor can spend on a property based on expected future income. It is a kind of safety net to ensure that an investment is profitable.

The residual method is not a standardized method, but is used to determine the maximum amount that can be invested. The costs to be borne by the investor are deducted from the sales value of the property. This method gives an indication of the maximum amount an investor can spend on a property based on the expected income.

Explained quickly and simply:

• Determination of the maximum investable amount by deducting investor costs from the sales value
• Not a standardized method, but a guide for investors
• Gives an indication of maximum investment potential based on expected returns

Determining the mortgage lending value: Minimizing the risk of loans

What does mortgage lending value calculation mean?

The mortgage lending value calculation is used by banks to determine the value of a property before it is used as collateral for a loan. The banks want to make sure that the property is worth enough to secure the money borrowed. They take into account how safely the property can be sold over a longer period of time. This helps to minimize the risk for the bank and to grant loans safely.

The determination of the mortgage lending value is also not standardized. Banks and the lending industry generally determine the mortgage lending value of the property in order to minimize the risk when granting a loan. The probability that the property can be sold safely at the mortgage lending value over a longer period of time is included in the valuation. In most cases, 70 to 80 percent of the achievable market value is made available as a credit line.

Explained quickly and simply:

• Determination of the mortgage lending value by banks to minimize the risk of loans
• Takes into account the security of selling real estate over a longer period of time
• Banks generally offer 70 to 80 percent of the expected market value as a credit line

Valuate property

You now know the typical methods we use to value a property, with a simple explanation. You can find more on this topic here:

• Valuate property

What is the property tax?

Homeowners, apartment owners, land owners, all are subject to property tax in Germany. The property tax is incurred annually and is calculated by the tax offices, more precisely the location tax office.

Property tax for owners of:

• Houses
• Condominiums
• Land

How to calculate the property tax?

Calculation in 3 steps – To calculate the amount of property tax, for a single property, there is a formula with 3 steps. First, you need the assessed value, simply put, the valuation from the tax office for your property.

Step 2 is the property tax rate, simply put, depending on the type of property you own, the value will be higher or lower. Example: In a semi-detached house, the property tax measurement number is slightly lower than a detached single-family house. Step 3 is the property tax assessment rate. This is set individually by each municipality. In this way, municipalities can also make themselves more attractive to house builders and capital investors, for example.

Formula:

• Determined assessed value x real estate tax rate x real estate tax assessment rate

The basis is the assessed value – the higher the assessed value of your property, the more property tax you pay, compared to the other owners in your community.

Property tax quickly explained

Let’s quickly summarize the property tax again, with the main apsects.

Property tax quickly explained:

• Annual tax on real estate
• Step 1 – Assessment basis = assessed value (valuation of your property by the tax office)
• Step 2 – Property tax rate : Property type
• Step 3 – Property tax assessment rate: Municipal assessment rate

Change due to real estate tax reform

1. Revaluation of ~ 35 million properties
2. Uniform evaluation by the federal government
3. Property tax C as a new category

Revaluation of ~ 35 million properties

Property tax has always been controversial since its introduction in 1998. This is because the basis for the valuation according to the BewG (Valuation Act) are outdated values from 1964 (old federal states) and 1935 (new federal states).

In 2018, the Federal Constitutional Court therefore ruled that there must be a fundamental reform of the property tax. It is to be implemented by 31.12.2024. Therefore, owners are now receiving letters from their tax offices, with a request to submit current data, for the revaluation of the properties.

• Old values from 1964 (old BL) and 1935 (new BL)

Read more about the methodology of the assessment here:

• Income capitalization approach
• Material value method

Uniform evaluation by the federal government

• Planned: Uniform federal evaluation methods
• Current: Different valuation methods in federal states

Property tax C as a new category

Still there are 2 types of property tax, property tax A and property tax B. Property tax “A” is used for land with agricultural and forestry use or short for agricultural. Property tax “B” you use for other developed and buildable land, so everything with building use.

With the property tax reform, there will be another category, the property tax C.

• Land tax “A” – agricultural use (land with agricultural and forestry use)
• Property tax “B” – building use (other developed and developable land)

Property tax “C” separates the previous property tax “B” into 2 parts. in property tax “B” will remain all other, developed land. Property tax “C” will be only for detached properties. That is, land that is not built on, but for which a permit has long been in place.

The aim of property tax “C” is to create new living space. Vacant land that is likely to be built on can thus be given its own (even higher) levy rate.

• Property tax “C” – detached building plots

Brokerage commission: costs and breakdown

If a real estate agent is involved in your real estate purchase, costs will be incurred. These are called broker’s commission. The amount of the commission depends on the amount of the purchase price as well as on the federal state. For private purchases, the broker’s commission is split 50/50 between the buyer and seller. For commercial purchases, this division is individually negotiable.

• Private purchase: 50/50 between buyer and seller
• Commercial purchase: Freely negotiable

Fees by state: Table

Depending on the state in which the property is located, different fees are due. In principle, you can expect a brokerage commission between 3.57% and 7.14%.

Brokerage commission: 3,57% – 7,14%

So for private purchases, these values apply:

Buying real estate: Learning from A-Z

Here you will find everything you need to know for your real estate purchase from A-Z: owner-occupancy or rental, financing a condominium, apartment search, real estate portals, brokers, valuation, purchase prices, negotiations and taxes. Knowledge and experience from experts, in one guide.

✓ A guidebook
✓ All facts
✓ Insider tips
✓ Purchase checklists

Learn step-by-step the home buying process and lots of insider tips!

• Buy apartment