Comparative approach. Methods for determining the value of real estate

In the world practice in the field of valuation of real estate, three approaches are used:

• Comparative, or market;
• Costly;
• profitable.

The choice of methodology largely depends on the object of evaluation and the real situation that has developed around a particular type of real estate. However, the most reliable way is still considered a comparative approach in determining the estimated value.

Basic principles of comparative evaluation

A comparative approach is a set of techniques for determining the market value of a property. Estimated real estate is compared with similar properties.

The basis of the evaluation is based on the following principles:

• Supply and demand. These two indicators are inseparably linked, a limited number of proposals generates a certain demand, and vice versa, the more offers, the less demand.
• Substitution. No buyer will pay a high price if the property with similar characteristics costs less.

The concept of market value is almost identical to the concept of an equilibrium price. The equilibrium price is a set of quantitative characteristics and pricing factors that determine the supply and demand for an object that is being compared.

The main criteria for choosing comparable properties for determining the value of real estate

Elements that are taken into account in the comparative analysis, a huge number, and their combination is almost equal to infinity. Therefore, the analysis is limited to a certain number of factors that directly affect pricing.

Elements of comparison. Quality of rights

Any encumbrance or easement leads to a decrease in the value of the assessed object. That is, any restriction in the ownership right is a price reduction. If the evaluated object in comparison with comparable objects does not have such drawbacks, then the price, on the contrary, increases.

For land plots availability of servitudes is not the only decreasing factor. When assessing the cost is very important, transfers ownership of land or the right to lease, permanent use. The latter two rights are referred to decreasing factors. It is very important whether the land has certain restrictions on further transactions with it.

Terms of sale

Such conditions are taken into account if the evaluated object does have distinctive features in the sale.

To the lowering factor is bankruptcy, that is, the seller is in a hurry to make a purchase / sale transaction, since the exposure time of the real estate market object is deliberately reduced in comparison with similar objects.

The assessment is significantly influenced by family ties and partnerships, although it is difficult to assess these risks.

If the seller and the buyer are connected by lease relations, and a contract of sale is planned to be concluded between them, then, in order to save on tax payments, the estimated value will naturally be understated. Motivation in this case is one - since the parties to the transaction are connected by other non-market relations, therefore, the seller actually lends the buyer. A similar situation develops if the transaction is on an option.

To increase the estimated value of residential property can lead to the prospect of getting a government subsidy for infrastructure development. The amount of anticipated concessional lending is determined by the difference between preferential and market lending.

Market conditions

A downward adjustment can be applied if there is a significant difference between the market value for a similar property and an expert one.

The change in the functional purpose can also be taken into account in the evaluation, since it affects the supply-demand ratio.

Location of the property

Physical factors (for land plots)

A comparative approach in assessing a land plot involves collecting characteristics about a property:

• the size;
• the form;
• geology;
• topography;
• The level of preparedness, that is, whether the earth has been cleared of vegetation, whether irregularities have been eliminated;
• Qualitative indices of the soil cover.

The greatest attention deserves the presence or absence of hills or slopes, rock formations or ditches. No less important, what is the carrying capacity of the earth, its strength, the availability of groundwater. It is very important whether there is information about the possible occurrence of minerals. If the information is confirmed, the land will necessarily be encumbered in the future.

General characteristics of the object to be evaluated

The market comparative approach is the study of characteristics that increase the value of objects. These include:

• The size of the structure or room;
• Height of the building;
• The availability and the area of auxiliary premises;
• ceiling height.

The material from which the building is erected is also important, the more modern and reliable it is, the higher the value of real estate. Not in the last place is the overall appearance of the whole building, the availability of repairs and convenient access. If the entrance is from the yard, then this will be a decreasing factor.

The lack of repair is an occasion to amend the assessment report. Such a calculation is made by the amount of costs for repair or restoration work, taking into account the profit that the entrepreneur will receive from investments in construction or repair.

Economic forces

A comparative approach in real estate is the accounting of possible savings on energy resources in the process of operation. The constant increase in the cost of utilities makes people constantly think about saving and using alternative energy sources.

In particular, this factor is important if the object is purchased for further leasing. The higher the ratio of income to the costs that will go to the operation of a building or premises, the smaller the return on net income from the rental of real estate.

This category includes the indicator of the presence or absence of meters, whether measures have been taken to minimize heat losses.

Other indicators

Evaluation involves accounting for the presence or absence of service elements. The simplest example is whether there is an elevator in the house or not. The presence or complete or partial absence of all communications, especially connected to the local system. If there are too many shortcomings, then a correction is made in the direction of decreasing. Estimation of real estate is carried out on a variety of indicators.

Stages of settlements

All calculations by a comparative approach are based on information from open sources about recent transactions with similar real estate.

Evaluation stages:

1. The study of similar proposals in a particular segment of real estate, the identification of comparable properties that were sold recently.
2. The collected information is analyzed, and individually each proposal is compared with the property being valued.
3. Allocation of pricing characteristics, amendment of the assessment report.

Reconciliation of the adjusted price and derivation of the final cost by a comparative approach.

Advantages of the comparative approach

First of all, the method allows to reflect the opinion of only typical buyers and sellers.

Valuation is reflected in current prices, taking into account changes in financial conditions and even inflationary processes. Evaluation is always statically justified.

To evaluate a specific property, you do not need to study the entire real estate market, but only similar properties. The technique is very simple, with a reliable result.

... and disadvantages

• It is difficult to find out the actual prices.
• Full dependence on the activity and stability of the real estate market.
• The difficulty in reconciling data, if similar objects significantly differ in terms of sales.

Finally

The essence of the comparative approach in real estate valuation is clear to both the buyer and seller. The technique allows the parties to study the real estate market and make sure that they have not lost their way. The valuation can be conducted on the basis of already conducted transactions or on the proposals of other sellers. In any case, a comparative technique is the systematization and comparison of data on similar real estate. The main thing is that the selection of similar objects for comparison should take into account special or unusual factors, for example, the threat of withdrawal of collateral, changes in regulations at the local level or failure to comply with the terms of the loan agreement, the existence of coercive elements.