28/04/2022 | Broker Tips

The basics of real estate valuation understandable for everybody

By Vincent Grognard, director of IMMO 4G real estate agency and partner of Lookmove

The subject of real estate valuation is very large. Manuals and books, each thicker than the other, are available. There are even studies that lead to the federal certificate of expert in real estate appraisal.

However, what are we really interested in? Whether you are a seller owner, a potential buyer, or broker. The question that bothers us is: how to estimate the correct market value?

This is the purpose of this article: to provide you with the basics of the real estate valuation of a villa or an apartment in PPE.

Houses and villas

To estimate its value correctly, you need to break it down to the basic factors:

Land
Construction of the property in a new condition
Obsolescence or depreciation
Outdoor facilities and landscaping

The value of the land

Each element can be calculated. The market value of land is determined by comparing the sale of similar plots.

Huge variations are observed in the value of building land. What makes all the difference is location.

Location can itself be subdivided to analyze its different components.

Regional infrastructure, municipal and cantonal tax rates, access roads, demography, employment in the region, etc. All those factors are included in the macro situation.

The micro-situation comprises:

view,
aspect,
the slope of the land,
the distances on foot or in time in relation to amenities,
the immediate neighborhood,
any nuisances,
etc.

The value of land is primarily determined by what can be built on that land. The more the densification is allowed by the building regulations, the more the land increases in value.

The value of the building

The value of the construction is determined by the volume built, the quality of the construction and the finishes.

A basic construction with basic finishes can be built at a cost of 700 to 800 francs per m3.

A standard construction with good finishes can be built at a cost of 800 to 1000 francs per m3.

These are approximate ranges of the cost. Each situation must be analyzed according to its specificities.

The negative value of the effects of time

Dilapidation, depreciation and obsolescence can be estimated using several methods. One of them is to deduct 1% per year of age of the construction. This discount is based on the value of the new construction.

If renovations have been undertaken during the life of the building, then the %age should be adjusted downwards. This is also true if the building has particularly suffered from climatic conditions or intensive use, for example. In this case the discount must be increased.

The logic is as follows: the amount deducted from the new built value of the construction should make it possible to refurbish the existing building to a new built value.

The value of outdoor facilities and landscaping

In addition to the value of the bare land, a correct estimate worthy must take into account the outdoor facilities.

Exterior facilities are costed according to their type.

If the outdoor facilities consist of a simple lawn, calculate 30 francs per m2. A heated infinity pool must be estimated as such. The range is between 80,000 and 150,000 francs or even more, depending on the case.

The value of the property

Once you have broken it all down into easier-to-quantify elements, you must then take into account all the amounts to obtain a value.

This value must then be weighted to take into account the local situation. If this house is the only one for sale within a 10 km radius, its market value will have to be weighted.

If, on the other hand, a development of 50 villas is about to be built 500 meters from your villa, you will have to adapt your selling price in order to make it competitive.

Apartments PPE

The other major category of residential property in Switzerland is condominium ownership. The PPE.

In this case, you are buying a fraction of a whole, often expressed in thousandths, and you have the exclusive right to use this part – your apartment. And a right of use shared with the other owners -the common parts.

The basics of valuation of villas explained above are valid regarding apartments. However, it is much more complicated to apply them.

This is why the market value of apartments is largely determined by the living area of the apartment.

All the criteria that determine the quality of the location have an impact on the price per m2. In addition, the age of the building and its degree of renovation and maintenance play an important role.

The analysis must, therefore, focus on the location, the condition of the building and the condition of the apartment.

A very good benchmark is again the price of new built apartments in the region.

This new built price must be weighted according to the condition of the building and the condition of the apartment.

A logical and easy to apply method is as follows: Price of new built apartment minus refurbishment costs = market price of the apartment.

This is of course a basic and simplified explanation. It has the merit of being logical and applicable.

In conclusion

Whether you are buying or selling, the basis of a successful sale or purchase is to sell or buy at the right price.

This right price is essentially determined by objective elements. Price per m2, price per m3, year of construction, amount of renovations.

This objective basis is then weighted according to criteria specific to the local market and intrinsically linked to this specific property.

The owner who wishes to sell must keep in mind that a price only has value if it finds a buyer.

The buyer who wishes to submit an offer to purchase must be aware that he is probably not the only one interested in this property.

It is indeed the law of supply and demand.

The offer constitutes the owners who are sellers.

Demand constitutes people who aspire to home ownership.

Everything is calmed down by the financiers who will only lend the sum necessary for the purchase if they are certain of recovering their money in the event of a forced sale.

The market is strongly driven by knowledgeable brokers who estimate market value to the best of their local knowledge and expertise.

Whether you are a seller, buyer or broker, to deepen your knowledge and skills regarding real estate appraisal, I invite you to visit the estimation article in our real estate blog, as well as on the real estate estimate page, which are mines of practical information on the subject.