Real estate valuation: the procedure in detail

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October 2023

How is a property valued?

A property is a long-term and relatively stable asset in terms of value and appreciation. Nevertheless, the value of a property can fluctuate significantly, as its determination depends on various factors and the choice of the valuation method. Four factors are particularly crucial in property valuation: location and its development, condition, size, and land value. With these data, a meaningful assessment of the market value of a property can already be made.For those who want to ensure the valuation of their own property, it is advisable to obtain a professional appraisal from an expert, such as a publicly appointed and sworn-in appraiser. An overview of all appraisers registered in the respective district can be found at the local Chamber of Industry and Commerce (IHK).

Property Valuation Methods and How They Work

Property valuation typically occurs using the market value approach. This approach provides the potential purchase price under ordinary circumstances according to § 194 BauGB. This law distinguishes three different methods for determining market value: the comparison approach, the income approach, and the cost approach. The prerequisites for these different valuation methods are regulated in the Property Valuation Ordinance (ImmoWertV).

  • Comparison Approach

The comparison approach determines the value of the property by using the achieved purchase prices of comparable properties. Factors such as location, year of construction, condition, and equipment of the respective buildings are compared. This method is particularly suitable for valuing undeveloped land and condominiums. However, it is less suitable for the valuation of unique and exceptional properties.

  • Income Approach

The income approach is primarily used for income-producing properties, especially for rented apartments and multifamily houses, where income generation for the owners is the primary focus. The valuation of these properties is based on the sustainable annual rent income after deducting all operating costs. The result is then adjusted using a multiplier, the value of which is derived from the expected remaining useful life of the building and the property interest rate. The land value is added to this value in the end.

  • Cost Approach

When determining the property value through the cost approach, only the building value and land value are simplifiedly summed up. The building value corresponds to the costs that would be required for a comparable new construction, minus any depreciation due to age. In case of an interim renovation, this depreciation is lower. This method is primarily applied to owner-occupied properties, such as single-family houses.

The market value approach is just one of many indicators

While determining the property value using one of the three variations of the market value approach provides a good indicator of the achievable market price, it does not necessarily reflect the true property value. The market price of a property can be influenced by many other factors and is also highly time-sensitive. For instance, the property value may increase even after a market value approach has been conducted, because, for example, the location has been upgraded due to improved public transportation access or an attractive employer has established itself in the region. Conversely, a market price can also be lower than the previously determined market value.

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