estate appraisal | Property appraisal

Property appraisal





In practice: Which sources are expected? How to add my sources?

Real estate appraisal is the appraisal of the value to which real estate is salable.

Summary
1 Definition of evaluation
2 Reasons for the evaluation
3 Main methods
3.1 The data taken into account
3.2 The four main methods of expertise
3.2.1 By comparison - market value
3.2.2 By discounting income
3.2.3 By estimating the depreciated replacement cost
3.2.4 By indexing
4 Notes and references
5 Appendices
5.1 Related Articles
5.2 External links
Definition of evaluation
Reasoned opinion on the value of a building, for a particular purpose, at a given date.
Reasons for the evaluation
There are several reasons for estimating the value of a building:

prepare a transfer (transaction),
finance or refinance the building,
perform the management acts (insure the building in new value, take stock of the value of its own property as part of a sound management, determine the rental value, ie the price at which we will rent the building) ,
pay taxes or verify their appropriateness (transfer taxes, property tax),
declare annually the value of a real estate portfolio listed on the stock exchange,
defend your rights in court.
The price of buildings governs, beyond investment, the lives of individuals, institutions and states. The contrast is striking: on the one hand, a major risk for savings of possible mispricing, on the other hand, all too often archaic practices of value estimation. The phenomenon is further amplified by the multitude of forms of analysis.

Main methods
Which method is able to evaluate, that is to "capture" effectively and usefully the value of a real estate asset?

A real estate valuation can be done according to several approaches:

Comparing prices on the market for similar goods.
The discounting of future gains generable with the good.
The calculation of the depreciated replacement cost of the property. This approach is particularly suitable for single-use or off-market buildings (schools, museums, factories, etc.).
The value is equal to the net income divided by the overall discount rate.
This is the formula used by financial institutions, but also by investors who consider real estate as a financial product1.

Difficult, the operation is usually entrusted to a specialist (real estate expert in France, approved appraiser in Quebec) who will take into account certain data and use four major methods that are applications of the three previous approaches.

The data taken into account
1. The physical data. They relate essentially to the nature of the building and its immediate environment:

current and potential destination (use),
size of the land, living area of ​​the building, corrected area, etc.
architectural quality, beauty, quality of materials, balance of the whole,
state of maintenance,
adaptation to its destination (level of internal comfort, existence of external nuisances ...),
location,
neighborhood.
2. Legal data. In France, they are essentially three in number:

zoning and the COS or land use ratio that determines the maximum number of building m², which affects the value of the land in the event of reconstruction,
the occupation of the premises (1948 law, dwelling, offices, etc.),
the limitations granted to the right to alienate (right of pre-emption urban, right of preemption of the farmers and SAFER).
Added to this is the notion of "scrapping value" retained by creditors in the case of foreclosure by the High Court and equivalent to about 75% maximum of the market value.
3. Economic data. They depend on the importance of the market and its evolution:

general economic situation: economic dynamism, interest rate, etc.
conditions specific to real estate: surplus or shortage of spaces of the type analyzed, future prospects, etc.
local circumstances, etc.
The four main methods of expertise
In practice, the expert uses several methods simultaneously to cross-check the results, but as there is no undisputed market price, there is no indisputable expertise.

In the case of an estimate before "sale at the bar" or by foreclosure before the high court, the expert establishes a "scrap value" generally equal to 75% of the market value.

By comparison - market value
It consists of comparing the building with other buildings of the same type that have been the subject of recent transactions, appraisals, court decisions or decisions of the tax authorities. By analogy we deduce the "market value" or "market value".

In Quebec, the term "par value" is frequently used.

By discounting revenues
It consists, from an income generally known precisely, for example the rent collected, to go back to capital.

Income depends more often on circumstances and regulations than on the value of the building. In addition, since the "usual yield" or "discount rate" can only be appreciated by comparison, this method is to some extent a comparison method.

By estimating depreciated replacement cost
It consists in estimating the cost of replacement of the building (equivalent to the cost of reconstruction minus the observed functional obsolescence) and to apply to the result a coefficient of obsolescence. The value of the land considered as vacant and according to its optimal use is added. The result of this method is all the more precise as the building is recent. To achieve true market value using this method, all obsolescence, especially economic obsolescence, must be taken into account.

By indexing
It can be practiced when, in the relatively recent past, an estimate has been established in a sufficiently credible manner by various means, such as a sale, another expertise, a court decision, a tax adjustment, etc. This value is indexed according to the price evolution of similar real estate.

This method is seldom used and formally discouraged in terms of the market value of the property It is however, used in terms of value using concepts of cost (replacement cost, insurance value).