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:
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
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
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
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 2024
You now know the typical methods we use to value a property, with a simple explanation. You can find more on this topic here:
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