When is it worthwhile to have your property assessed? What makes a good assessment 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.
How can we evaluate a property assessment?
When you request an assessment, the first thing to define is the purpose of the assessment, since the values obtained with assessments for different possible purposes can vary greatly. We can approach this question from two directions: what do we intend to use the valuation for, on the one hand, and in which cases does a given method provide accurate and usable information, on the other hand.
First, we should investigate what the different assessment methods mean and where they can be used.
The most important assessment methods are as follows:
1.) assessments based on market value, such as
a. income approach (yield-based) valuation
b. turnover approach (comparative) valuation
2.) cost-based valuation
A YIELD-BASED VALUATION, to put it simply, calculates the value of an asset on the basis of profits earned with that asset, that is, it provides an accurate figure first of all in the case of income-generating properties, where the main characteristic is the “money-making ability”. Typically, these are residential properties, retail outlets, hotels, or offices that are rented or easy to rent out, as well as any property likely to generate long-term and permanent cash inflow.
In a TURNOVER-BASED VALUATION, we analyze properties that were recently sold or offered for sale on the real estate market, and we compare these with the property subject to the valuation. In the valuation of plots of land, as well as buildings the turnover-based approach provides a more accurate value.
A COST-BASED VALUATION essentially means that a cautious buyer will not pay more for the property than its production costs. In general, this method provides the most reliable value in the assessment of newly-built or special-purpose properties. A special-purpose property can be, for instance, a hospital or a church, where neither a comparison nor the analysis of the income-generation ability are applicable. At the same time, the value obtained this way has the least to do with market transactions, therefore, one should handle this method and the interpretation of the value thus obtained with particular care.
A valuation is probably most accurate when it provides almost identical values when carried out using all three methods. A frequent mistake occurs when the values are simply weighted in the case of vastly divergent valuations, giving an average that has little to do with the judgement by the market. Therefore, we should take care not to use a method that is likely to distort the value. For instance, in the case of a property to be operated as a kindergarten, it does not make sense to use an income-based valuation, but even the turnover approach is difficult to interpret. If, in such a case, we produced all three values and determine an estimated value by weighting, we would have a mathematically provable value, though one that is potentially quite far from reality due to the fact that we had applied weight to a value not taken into consideration by the market during the sale.
Upon knowing the various methods, we can assign an appropriate one to the given purpose of the valuation. Based on property usage, a distinction can be made among the following major assessment purposes:
3) loan security
4) accounting considerations
5) other information-gathering (e.g. for rental or for strategic decisions).
Compulsory content requirements
Finally, one more important consideration: what is the minimum that a valuation must contain?
It is very important to ensure that a valuation provides information for the outsider that enables its verification and safe acceptance. Different instances prescribe many different things as content requirements. The following is a list of the minimum requirements without which a valuation shall not be accepted:
- Exact identification of the Client and of the Agent.
- Determination of the purpose of the valuation.
- Date and period of validity of the valuation.
- Data, documents used.
- Description of the methods applied.
- Data of the land register, identification of any unsolved issues.
- Location of the property, its characteristics, available utilities.
- Technical description, status of the buildings and erections.
- Comparative data.
- Value-modifying factors.
- The result of the valuation, itemised valuation.
- Any disclaimers, certificate.
- As an annex: the title page from the land registry, the plotting diagram, the contracts affecting the value, blueprints, photos.
Of course, it can happen that not all of the above can be collected, but the valuation in such a case must disclose the reason for any missing items and also cover the issue of how far this might affect the value. Armed with the above information, (though this article by no means covers all there is to know), even a layman can judge the acceptability of a valuation to a certain extent.