Valuing real estate: determining the right price |

Property valuation: determine the price professionally

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26.07.2021 | 3 minutes

There are three standard methods for arriving at a reliable price: the comparative value, replacement cost, and income approaches. Read which factors are considered when and for what purpose to obtain an estimated price.

When is a real estate valuation important?

A professional real estate valuation provides clarity to all the parties involved. As part of a real estate valuation, a house or apartment is assessed against objective criteria to arrive at a market value, i.e., a realistic purchase price that takes into account objective factors such as the location, condition and other characteristics of the property.

An objective valuation is also important because mortgage institutions carry out their own valuation during the credit check. If this value is lower than the purchase price, buyers will be faced with a financing gap. For example, let’s say a property is for sale at a price of one million francs. The rules generally require a deposit of at least 20 percent, i.e., CHF 200,000; the remainder (CHF 800,000) can be financed with a mortgage. If the mortgage institution now determines a lower market value, the calculation will change.

If, for example, the institution estimates the value at only CHF 900,000, the loan amount will be calculated based on this figure. Since 2014, the “lowest value principle” applies, according to which banks and insurance companies must use the lower of the two values – market value or sales price – to calculate the loan amount. In our example, this means that the loan amount is set at 80 percent of CHF 900,000, i.e., CHF 720,000. If the purchase price remains at one million francs, the buyer needs to find an additional CHF 80,000 to close the gap. The market value is not only important to realistically assess the offer, but also to avoid unpleasant surprises when it comes to obtaining a mortgage.

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The three main methods for assessing the value of real estate

You could of course have the value of a property assessed solely by an expert. Owners generally use this comprehensive but comparatively expensive method when they want a valuation to sell their property. Of course, buyers can also benefit from the findings of an appraiser. In this article, we illustrate other methods in addition to this rather costly option.

There are several methods for calculating the value of a house or apartment in a more formulaic way. The three most common valuation methods for real estate are the hedonic or comparative value approach, the income or capitalized income value method, and the replacement cost or asset value approach. In many cases, you can carry out a property valuation online. Which approach is the right one for your property also depends on how the property is currently used or how it is to be used after purchase, for example, privately or commercially, for rental or own use.

The hedonic or comparative value approach

The hedonic approach assesses a property by comparing it with thousands of properties in the same area. To arrive at an average purchase price, it values the property based on properties that have recently changed hands. The focus is on the factors that affect the price of a property, including criteria such as the macro location (area, community, transport connections, etc.) and the micro location (schools, street type, elevation, shopping facilities, etc.).

The comparative value approach also assesses the relevant property characteristics. These differ according to quantifiable factors such as number of square meters, usable area, number of rooms, as well as qualitative criteria such as year of construction, condition, equipment.

A woman uses an online calculator to calculate the value of a property
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The hedonic method, which has been used in Switzerland for over 20 years, has become increasingly important in recent years. Its advantage is that provided all the information about the property is available, the valuation can be carried out very quickly through comparison with a database. This makes it more time-efficient and cheaper than many other methods. The hedonic method is often used in online calculators, allowing you to get an estimate from the comfort of your home. It is especially suitable for valuing private single-family homes and condominiums.

The income approach

With the income approach, the value of the property is based on the rental income. The focus of this approach is on how much profit from rental income a buyer can obtain from the property. This method is best suited for rented residential properties and commercial properties purchased as an investment.

Real value method or replacement cost approach

In the case of the real value method, also called the replacement cost or asset-value-based method, the value is the new value of the house (minus age depreciation) plus the value of the land.

With this method, the assessment of the existing building fabric by a property appraiser or building expert is particularly relevant, above all, to consider structural damage, repair backlogs and modernizations. An inspection of the property is therefore always required to determine the replacement cost.

This method is commonly applied to all non income producing objects. And it serves mortgage institutions to check the plausibility of hedonic estimates if sufficient comparative data are not available. For example, in the case of real estate in remote areas or extraordinary properties such as some luxury or collector’s items.

Conclusion: which method is best?

The best method will always depend on the individual case. For example, the comparative value approach cannot be used if there are too few comparable properties in the area, such as in rural areas or if a house is isolated or remote. Here, the replacement cost method can be used instead. The same applies to unusual, one-off detached or custom-built homes. The replacement cost method requires assessors to have a sound knowledge of the real estate market to adjust the price. The income approach requires a realistic assessment of future revenues. This method focuses on the profit that can be obtained from a property and is therefore mainly suitable for investors. Depending on the method and providers, you can run a valuation online or have it performed by an expert who visits the property in person. However, the latter is generally the more expensive option.

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