What should buyers and sellers of real estate know about real estate valuation?
Māja, nekustamais īpašums, Photo by todd kent on Unsplash
Almost everyone buys or sells real estate at some point in their lives. This is a process that involves several essential steps and specific documentation. One of the most important documents involved in the purchase or sale of real estate is real estate valuation, which is drawn up by a specialist called a real estate valuer. The largest real estate company in the Baltics, Ober Haus Real Estate Latvia, explains what you need to know about real estate valuation.
What are the most common questions a valuer is asked?
“Taking into account that there are different types of real estate (valuation objects), starting from standard apartments to complex commercial objects and specialised property, the questions differ depending on the type of property.
In the segment of residential property, clients are, of course, most interested in the valuation results, in order to make sure that the price of the purchase/sale transaction corresponds to the market situation, as well as to evaluate the mortgage options suitable for their circumstances. In addition, clients are often interested in how the value of the property might change after renovation of the premises, as the valuer can provide advice not only on the current circumstances, but also on the property in a future condition, for example after completion of planned construction. When the client (buyer) evaluates the possibilities for buying real estate, sometimes they need advice on the legal situation and technical condition of the property to identify potential problems and possibly get a better offer from the seller. The valuer is an independent specialist who is able to objectively assess the situation and circumstances that are relevant to the transaction, or help the client choose the most appropriate of several purchase options.
In the segment of commercial property, valuation is important for the client to assess the current circumstances of the business and possible future scenarios for decision-making purposes. If it is an existing property with cash flow, the valuer provides an opinion on how the rent corresponds to market conditions, as well as their professional opinion on the best and most efficient use of the property, which can sometimes help the owner significantly improve the performance of their business. Before the implementation of a development project, the valuer’s opinion on the project’s estimated revenue and expenses can protect the entrepreneur from significant losses, confirm the project’s potential for investors and credit institutions, or help identify more appropriate solutions given the market conditions,” explains the head of valuation department at Ober-Haus.
What documents do valuers need from a client?
“As I mentioned previously, there are different types of real estate. Consequently, the required information and documentation depends on the type of object to be assessed and the valuation task. In standard situations, the valuer expects a plan of the premises (a copy of the cadastral survey), a printout of the land registry and a land boundary plan, if it is not a condominium. If construction is planned, then a building permit, project documentation and cost estimate are also required (if the construction of the property is in progress, then information on the completed work and related costs is also required to determine the stage of completion and additional investments required).
When valuing commercial property, it is important for the valuer to know the list of tenants and their contract terms, as well as the property income and expenses. In addition, they require information on planned capital investments, financial liabilities and expected changes. For the valuation of specialised properties, the valuer also needs to get acquainted with the financial indicators of previous years and the planned budget.”
What do clients find most confusing about valuation?
“Sometimes, there is a misunderstanding about the valuation result. It is important to distinguish the concepts of “price” and “market value” of the property. It should come as no surprise that the price of the property may differ significantly from the value determined by the valuation, assuming that the valuer has done the work properly. For example, the seller may want to sell their property quickly at a lower price, or the buyer may be particularly interested in a specific object for personal reasons and therefore willing to pay a price above the value. In determining market value, the property is assessed objectively by accepting a transaction between parties that are not related, are not under duress or pressure and do not have any special interests, in accordance with typical market practice.
In commercial property valuations, sometimes clients do not understand why they should disclose detailed information about the property circumstances and concluded lease agreements (business secrets!) to the valuer, but in order to determine the value of the property most accurately, the valuer must have the same information as a potential buyer. This is especially important when the addressee of the valuation is also a credit institution. Despite what clients may think, often complete information and assessment of the real circumstances with as few assumptions on the part of the valuer as possible are what gives credit institutions the greatest confidence in the value of their collateral and possibly more favourable conditions for the client’s credit obligations.”
Are there any stereotypes about valuation?
“There seems to be a stereotype that valuers have the freedom to express their opinion without any formal criteria, and an undesirable result is often perceived as a consequence of quick work and “not going deeper”. In fact, valuation is a strictly regulated profession and the work results must be based on methods that comply with valuation standards, market research and comparable transactions. A certified valuer is personally liable for their conclusion and has likely put a lot work into the assessment before announcing a potentially controversial result, while protecting themselves, their client, the credit institution and, more broadly, the stability of the Latvian financial system. A competent valuer will be able not only to logically explain the calculation process and substantiate the result, but also to assess the impact of previously unknown or specified data and assumptions on the determined value. However, if the client has reasonable suspicion that the valuer has worked improperly, it is possible both to turn to another valuer for a second opinion or contest the valuation through the Latvian Association of Real Estate Valuers, which is binding for all certified real estate valuers in Latvia.”