How to Find the Value of Your Property

Are you planning on buying a home? Have you inherited property? Or are you interested in finding out what your home is worth? A property valuation can help you determine the value of real estate. But how reliable are these valuations? Which different valuation models are there? What do they cost? Swiss online comparison service moneyland.ch answers the most important questions about property valuations here.

What is a property valuation?

A real estate appraisal or valuation indicates a property’s fair market value. Valuations normally determine both the value of the land and the value of buildings separately. Property appraisers take numerous factors into account when valuating real estate. If you are interested in buying a property, take a look at the things to consider when buying property in Switzerland.

• Land value

For most real estate, the land value is the most important price-determining factor. Things which affect the price of land include the region and location, and the size of the plot. In simple terms, land value is the value a piece of land would have if it did not have any buildings or other constructions on it.

Land prices in Switzerland have tendentially gone up. Steady demand has been the driver behind land value gains. Over the past decades, this has made Swiss property attractive to investors in addition to home buyers.

• Building value

The building value indicates how much all of the constructions on a piece of land are worth. Factors like the quality of construction and the building’s actual cash value play a role. Buildings normally lose value over time, unless they are regularly renovated, improved, or reconstructed.

Do I need a property appraisal?

Because real estate is one of the most expensive kinds of property you can own, it makes sense that you get to know the its value before you engage in any kind of dealings. But understanding the value of your property is difficult because every piece of real estate is unique. That is why a property appraisal is recommended or even necessary in certain situations. These situations include:

• Selling a property: A typical scenario is that, as the seller, you need a value on which to base the price you want to get for the property. An appraisal gives you a good idea of the price you could get for a property. It also helps to clear up any false expectations resulting from sentimental attachments, by providing you with a realistic reference of what the property is worth on the market.
• Buying a property: If you are interested in buying a property but are not sure whether the price being asked corresponds to its actual value (because the seller is basing their price on an outdated valuation, for example), it can make sense to have the property appraised yourself to get a second opinion.
• Inheriting a property: In order to know how much tax you will pay on an inherited property, you have to know its fair market value. Knowing a property’s value is also useful when an inheritance is being divided up between multiple heirs.
• Divorce: If a property is owned by both partners collectively, the property’s value will often need to be determined during a divorce. A valuation could be necessary, for example, if one partner wants to keep the home by compensating the other partner for the portion they own. Having the property appraised by experts (rather than online valuations) is generally recommended for divorces, because this carries more weight in possible legal disputes.
• Taxation: If you believe that the tax office is using an inflated fair market value for your home, getting a second opinion can make sense.
• Renovations: Renovating a property can increase its value or compensate for value loss. The only way to know for sure whether or not a renovation has increased a building’s value is to have the property valuated by a professional appraiser.
• Wealth evaluations: If you own properties as assets and want to know how their value has developed, then an appraisal is needed to determine this.

How can I get a good property valuation?

You can have your property appraised either online, or in person by an expert.

• Online appraisals

Online property appraisals require you to enter a list of key figures into a form. Necessary figures include the year of construction, the living space, and many more. After submitting the form, you receive an estimate of your property’s fair market value.

There are numerous platforms offering online property appraisals, and you can find many of these using a search engine. Many of these platforms do not perform the appraisal themselves, but simply use databases provided by large real estate service providers like IAZI and Wüest Partner.

• Valuations by professionals

Individual valuations by experts are normally more involving, and typically require a viewing of the property in question. Valuations are usually performed by architects with further education in property appraisals.

There are many service providers which offer expert property valuations. In addition to large service providers (like IAZI and Wüest Partner), some of which are internationally active, there are also many regional companies which can perform this kind of appraisal (real estate agencies, for example). One argument in favor of using regional service providers is that they may understand the local real estate market better than national appraisers.

Getting multiple offers and comparing quotes can pay off. On the one hand, it is important that you use a property appraiser that you trust. On the other hand, there are price differences between service providers.

How does a property valuation work?

There are a number of methods used by appraisers to valuate a property. Which method is best suited to your needs depends on whether you need an online appraisal or an expert valuation, and on your reason for buying or selling the property. Many large real estate companies offer several or even all available methods. Here is an overview of the methods required:

• Cost appraisal method

The bases for cost-based appraisals are simple: When you buy a property, you do not want to pay more than you would pay to buy an identical piece of land and construct an identical building. The so-called real value of a property is made up of the land price, plus the actual cash value of the building.

Many factors, including land prices, construction types, and development costs are reviewed in order to determine the real value. Appraisers often use their own proprietary models to calculate this value, so even though a cost appraisal should show the actual value of a property, the figures can vary somewhat depending on which appraiser you use.

The cost appraisal method is primarily used to valuate properties which are not being bought primarily as investments. This kind of appraisal is suitable when you are looking to buy yourself a home, for example.

• Hedonic appraisal method

The hedonic method of evaluating a property’s market is based on comparing a property to other transactions. The appraiser studies the prices at which comparable real estate in similar locations has been bought and sold for in the recent past. Only effective changes of hands are accounted for. The prices at which properties are offered by their owners are irrelevant.

These appraisals are based on statistical data, so the appraiser has to have access to large amounts of data about past property transactions. In many cases, thousands of comparable sales are reviewed. The hedonic appraisal method is used for many kinds of properties. Many banks use this method to determine the value of properties when considering mortgage applications. Online appraisals often make use of the hedonic method.

The advantage of hedonic appraisal is that it is relatively cheap. An online appraisal of a single-family home normally costs between 300 and 400 francs.

The disadvantage is that the property itself is never viewed, which makes hedonic appraisal somewhat imprecise. According to the Zurich homeowner’s association, hedonic appraisal can have a margin of error of up to 20 percent above or below the fair market value. Hedonic appraisal can be even less precise in the case of real estate with unusual properties (such as special usage rights), because less data for comparable real estate is available.

• Income appraisal method

The income appraisal method is primarily used for investment properties. The property is valuated based on the income which it can potentially earn. The income potential is determined by many different factors. These include the gross income multiplier (GIM), typical rents in the region, expected demand for rental space, maintenance costs, the residual lifespan of the building, and the potential for raising rents.

The income appraisal method is designed for individuals and investors like banks, who want to know what kind of returns they could generate from a piece of real estate. If you are simply looking for a home to live in, then this appraisal method normally is not the most suitable.

• DCF appraisal method

The discounted cash flow (DCF) appraisal method is most commonly used for investment properties and commercial properties. The term refers to the discounting of future cash flows. In a DCF valuation, the appraiser calculates the actual purchasing power of the income which a property is expected to earn (rental income, for example). The underlying assumption is that a property is worth as much as the returns which it can bring to its owners.

For a DCF appraisal, the appraiser calculates the free cash flow on the one hand, and the property’s discount rate on the other. The discount rate is adjusted to match the risk associated with an investment (the risk of volatile financial markets, for example). So the two main factors for the valuation are the potential income and the potential risks, accounting for the actual purchasing power of the money.

As with the income appraisal method, DCF appraisals are generally not necessary if you only want to buy a home to use as your own residence, because you normally would not count on earning income from the property. According to IAZI, this type of property valuation is most widely used for apartment houses, office space, and retail space.

What do property appraisals cost?

As a general rule, online appraisals are much cheaper than individual appraisals by experts. An online appraisal of a single-family home based on the hedonic method usually costs between 300 and 400 francs. Property valuations by experts cost upwards of 800 francs, and can be much higher than that in some cases (3000 francs, for example). The price you pay for an expert appraisal depends on the method used, the complexity of the real estate in question, and the number of viewings required for the valuation.

In the overall picture, the costs of a property appraisal are often negligible. Because property prices tend to be very high, appraisal costs make up only a tiny fraction of the overall costs or property value. Example: You pay 1000 francs for the appraisal of a single-family home, after which you buy the property for 1 million Swiss francs. The costs of valuating the property come to just 0.1 percent of the purchase price. But the total costs of appraisals are higher if you end up appraising multiple properties in your search for the perfect home,  

If you are using a real estate agency to buy or sell your home, you do not normally need to pay for each appraisal individually, as these costs are normally covered by the agency’s commission.

When a bank requires an appraisal for a property which is being mortgaged, it normally performs the valuation using the hedonic method, at no cost to the customer. In specific cases, such as when a more complex method is required, it is possible that mortgagors may have to cover part of the appraisal costs.

Are there any free property appraisals?

Yes. A number of online service providers like Agent Selly and Houzy offer free property appraisals. You can submit information about your home on their websites or in their mobile apps to get free appraisals. Normally, these are simplified hedonic appraisals based on the databanks of rating services (like IAZI).

The margin of error can be very large for these free appraisals. For example, a portal may provide a value range with a maximum estimated value which is more than one-third higher than the minimum estimated value (900,000 to 1,250,000 francs, for example). Getting a more precise valuation can make sense, even if you have to pay for it.

Paid offers usually account for more data, and this added data can be used to generate more reliable results.

Which method should I choose?

Free appraisals are usually imprecise – and the service providers which offer them know that. Because of that, free appraisals are often just a means of obtaining your contact information in order to offer you other (more useful) paid services. In the best case, these free property valuations can give you an initial idea of what a property could be worth. This could be useful, for example, if you are interested in a number of different properties, but have not yet narrowed your search down to where you are ready to pay for appraisals. If you are actually serious about buying or selling a property, you should consider a paid valuation.

For most standard properties, an online appraisal based on the hedonic method should suffice, and is generally also more affordable. But if the property has unusual features, which is often the case with luxury housing or farmhouses, for example, then getting an on-site appraisal is recommended, even though it costs more.

If there is potential for legal conflicts which may involve the property (a divorce, for example), then it is a good idea to get an expert appraisal from the beginning. If you opt for an online appraisal instead, you may end up having to pay again to have an expert value your property later on.

How reliable are property valuations?

As a general rule, more expensive appraisals provide more accurate results based on your specific piece of real estate. But even appraisers who come and value your property on site cannot give you an exact figure at which you will be able to sell your property. Real estate does not have an absolute value which dictates the prices that buyers pay. The fair market value of a property simply serves as a basis for price negotiations.

You have to assume that even the fair market value figures shown by the best (and most expensive) property valuations will have a margin of around 10 percent above and below the effective market value. When the hedonic method is used, the margin of error is around 20 percent.

How long is an appraisal valid for?

Normally, the appraised fair market value for the sale of a property is valid for one year. If the selling process lasts longer than one year, getting a new valuation to find the current market value can make sense.

Every valuation is generally based on the assumption that neither the property, nor the real estate market, will undergo major changes. Appraisals can only be based on the property’s market value at the time of the valuation. Future changes – such as the establishment of better public transportation connections in the neighborhood – are not reflected in the valuation unless they are already foreseeable when the appraisal is made. For this reason, if is necessary to get a new appraisal after major changes occur.

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