How much is your property worth? I.

When is it worthwhile to have your property assessed? What makes an assessment good from a professional perspective? If you’ve found yourself pondering these questions as either a property owner or a potential buyer, then you may find a few of points of interests in the following short synopsis.

Experiences with property assessment
Nowadays, most corporations only have an assessment prepared when necessitated by external reasons or compelling circumstances. A compelling factor can be, for instance, the bank in the case of a loan application, or the auditor in the case of a revaluation for accounting purposes. It is far less common to request an assessment in order to be aware of a property’s exact value. This is despite the fact that the value of properties constitute a decisive portion of most companies’ assets. It should be obvious that strategic decisions made on the basis of an inaccurate asset value figure can result in substantial damages. For instance, property sold below its value not only generates lower proceeds, but it can also limit the opportunity to fund investments from sales proceeds. At the same time, in the case of a property offered for sale at prices well above a realistic market value, a failure to sell or a delay in the process can also have a negative impact on the planned investment.

It is a commonly held belief that the reason there is no demand for valuation expertise is that many companies have their own property experts, who are expected to be aware of the property values in question. At the same time, real estate professionals that are also employees are mostly unable to determine a realistic market value of a company’s properties, since they are not independent. Such individuals estimate a property’s value primarily on the basis of the technical parameters or the value represented by using these. Furthermore, they rarely have the market awareness, data, or sales experience necessary for setting an accurate market value. Professionally reliable valuators hold a value database consisting of several hundred property items each, and their work is repeatedly supported by the sales activities of their client companies. On the basis of the above, it becomes understandable why there are differences in the property value expected by an owner and the value determined by a professional property valuator.

Therefore, it is worthwhile to assign an independent valuator (perhaps even within the framework of a long-term contract) to make assessments of the company’s assets and keep a continuous record of these values. In addition to all these advantages, specific valuation needs at any given moment (such as the determination of collateral for loans) can be addressed quickly and at lower costs.

When we already have an assessment, the next task is to find out whether the valuation obtained is professionally acceptable.

Pick two
An old joke describes a consultant’s advertisement that reads: “Our company is accurate, fast, and cheap. Out of these three features, our esteemed clients can pick two.â€? Due to market competition, those seeking an assessment emphasize the need to have it prepared within the shortest time, at the lowest possible costs. These two expectations, however, deteriorate the level of professionalism and the reliability of the “mass produced” assessments thus prepared.

In addition to client requirements, legal constraints must of course also be met. In general terms, assessments must comply with regulation 25/1997.(VIII.1.)PM, and in the case of arable land, with regulation 54/1997.(VIII.1.)FM. Even though these regulations are mandatory only in the case of mortgage lending, it is worthwhile to rely on these in each assessment in the absence of other provisions, with the addition of any other necessary elements. The regulations make an attempt to localise existing international standards (e.g. EVS – European Valuation Standards) more or less successfully into Hungarian practice.

The types of valuations available (according to their content elements) are:

  • Fully detailed.
  • These are the assessments that best comply with the PM (FM) regulations and other provisions (e.g. TEGOVA), the calculations and the explanatory notes are communicated in textual and/or tabular format.

  • Data sheets, fixed format.
  • Data sheet valuations, also known as abbreviated valuations, enabling the fast implementation of large-volume valuations. These are prepared for special purposes (primarily in determining collateral for loans) or according to individual needs, their use is respectively limited.

  • Poor “valuationsâ€? on a few pages that do not comply with the PM (FM) regulations (mainly used at banks where the list of eligible valuators is long and thus the possibilities of filtering for quality are limited).

Currently, the issue of property assessment is essentially not settled. Often, clients pick their valuators not on the basis of professional recognition (quality), but based on price or the foreknowledge that the valuator will indicate the value required for a given loan. As a result, there are many “valuatorsâ€? on the market (and also listed at banks) who prepare valuations that do not meet genuine professional standards. Unfortunately, this means that the selection process at banks does not always guarantee the professional quality of the assessments that are carried out. The main reasons for this are assignment fees established below the market rate and deadlines that are too short, both of which ignore the resources and time required for a proper valuation.

In addition, setting a value always carries certain subjective elements that cannot be replaced by any data, calculation method, or prescribed format. That is, those who do not have a clear understanding of the market situation and have no adequate experience might comply 100% with the requirements regarding form and substance, and the documentation thus prepared may be perfect from a formal point of view, but the valuation could still not be adequate for the purpose for which it was created. The trickiest thing, of course, is to determine where these insufficiencies lie.

In the continuation of our article, we will give an overview of the content elements and calculation methods applicable to property assessments, on the basis of which clients can begin to “assess the assessmentsâ€?, as it were.

Ferenc Martonosi, Head of Valuation Division