In world practice in the field of real estate appraisal, three approaches are used:
- comparative, or market;
- costly;
- profitable.
The choice of methodology largely depends on the object of assessment and the real situation that has developed around a particular type of real estate. However, the most reliable way is still considered a comparative approach in determining the estimated value.
Basic principles of comparative assessment
A comparative approach is a set of techniques for determining the market value of a property. Valued property is compared with similar properties.
Assessment is based on the following principles:
- Supply and demand. These two indicators are inextricably linked, a limited number of offers generates a certain demand, and vice versa, the more offers, the less demand.
- Substitution. No buyer will pay a higher price if a property with similar characteristics costs less.
The concept of market value is almost identical to the concept of equilibrium price. The equilibrium price is a combination of quantitative characteristics and pricing factors that determine the demand and supply for the object that is being compared.
The main criteria for the selection of comparable objects for determining the value of real estate
There are a huge number of elements that are taken into account in the comparative analysis , and their combination is almost equal to infinity. Therefore, the analysis is limited to a certain number of factors that directly affect pricing.
Elements of comparison. Quality Rights
Any encumbrance or easement leads to a decrease in the value of the valued property. That is, any restriction in the right of ownership is a reduction in price. If the estimated object in comparison with comparable objects does not have such drawbacks, then the price, on the contrary, increases.
For land, the availability of easements is not the only downward factor. When assessing the value, it is very important that it transfers the ownership of land or the right to lease, permanent use. The last two rights are referred to as reducing factors. It is very important whether the land has certain restrictions on further transactions with it.
Terms of sale
Such conditions are taken into account if the evaluated object really has distinctive features when selling.
Bankruptcy is attributed to a lowering factor, that is, the seller is in a hurry to complete a purchase and sale transaction, since the exposure time of a real estate market object is deliberately reduced compared to similar objects.
The assessment is significantly influenced by family ties and partnerships, although it is rather difficult to assess these risks.
If the seller and the buyer are connected by lease relations, and it is planned to conclude a contract of sale between them, then in order to save on tax payments, of course, the estimated cost will be underestimated. The motivation in this case is the same - since the parties to the transaction are connected by other non-market relations, therefore, the seller actually credits the buyer. A similar situation arises if the transaction is on an option basis.
The prospect of receiving a state subsidy for infrastructure development may lead to an increase in the estimated value of residential real estate. The size of the proposed concessional lending is determined from the difference between concessional and market lending.
Market conditions
A downward adjustment may be applied if there is a significant difference between the market value for similar real estate and expert property.
The change in functional purpose can also be taken into account when evaluating, as it affects the ratio of supply and demand.
Property Location
Cost Increasing Factors | Cost-cutting factors |
Prestige of the area Status of other residential property owners Zone Preservation Parking availability Access to highways The presence of architectural monuments and other attractions Recreational area near real estate Unique features of building architecture | Distance from the central part of the city Lack of grocery stores within walking distance Remoteness from school and preschool institutions Bad environmental conditions in the region The presence of factory and warehouse enterprises near the property, landfill |
Physical factors (for land)
A comparative approach when assessing a land plot involves collecting characteristics about the property:
- the size;
- the form;
- geology;
- topography;
- level of preparedness, that is, whether the land has been cleaned of vegetation, whether irregularities have been eliminated;
- quality indicators of soil cover.
The presence or absence of hills or slopes, rock formations or ditches deserves the greatest attention. It is important that the bearing capacity of the earth, its strength, the presence of groundwater. It is very important whether there is information about the possible occurrence of minerals. If the information is confirmed, then the land will certainly have a burden in the future.
General characteristics of the object to be evaluated
A market comparative approach is the study of characteristics that increase the value of objects. These include:
- size of building or premises;
- building height;
- the presence and area of auxiliary facilities;
- ceiling height.
The material from which the building was erected also matters, the more modern and reliable it is, the higher the value of the property. Not in last place is the general appearance of the entire building, the availability of repairs and a convenient entrance. If the entrance is from the yard, then this will be a lowering factor.
Lack of repair is a reason for amending the evaluation report. Such a calculation is made according to the value of the costs of repair or restoration work, taking into account the profit that an entrepreneur will receive from investments in construction or repair.
Economic forces
A comparative approach in real estate is to take into account possible savings on energy resources during operation. The constant increase in the cost of utilities makes people constantly think about saving and using alternative energy sources.
In particular, this factor is important if the object is acquired for further leasing. The greater the ratio of income to the costs that will be spent on the operation of the building or premises, the lower the amount of returnable capital in the net income from the rental of real estate.
This category also includes the indicator of the presence or absence of meters, whether measures have been taken to minimize heat loss.
Other indicators
Evaluation involves taking into account the presence or absence of service elements. The simplest example is whether or not there is an elevator in the house. The presence of either a complete or partial absence of all communications, especially those connected to the local system. If there are too many shortcomings, then a correction is carried out in the direction of reduction. Real estate assessment is carried out for many more indicators.
Settlement Stages
All calculations by a comparative approach are based on information from open sources about recent transactions with similar real estate.
Assessment Stages:
- The study of similar offers in a particular segment of real estate, identifying comparable objects that have been recently sold.
- The information collected is analyzed and individually each offer is compared with the evaluated property.
- Highlighting pricing characteristics, amending the evaluation report.
Coordination of the adjusted price and the derivation of the final cost by a comparative approach.
The advantages of a comparative approach
First of all, the method allows you to reflect the opinion of only typical buyers and sellers.
The cost estimate is reflected in current prices, taking into account changes in financial conditions and even inflationary processes. Evaluation is always statically valid.
To evaluate a specific property, you do not need to study the entire real estate market, but only similar objects. The technique is very simple, with a reliable result.
... and flaws
- It’s hard enough to identify actual prices.
- Full dependence on activity and stability of the real estate market.
- Difficulty in reconciling data if similar objects differ significantly in terms of sale.
Finally
The essence of the comparative approach in real estate valuation is clear to both the buyer and the seller. The methodology allows the parties to study the real estate market and make sure that they are not lost. Valuation may be based on transactions already completed or on the proposals of other sellers. In any case, the comparative method is the systematization and comparison of data on similar real estate. The main thing is that the selection of similar objects for comparison takes into account special or unusual factors, for example, the threat of a withdrawal of collateral, changes in regulations at the local level or failure to fulfill the terms of a loan agreement, the presence of coercive elements.