What is the property worth? Asking price, market value and the owner’s investments

From the series “Property transactions, explained by specialists” — Lucian Dima in conversation with the professionals involved in a transaction.

Lucian: George, the owner tells me: “Lucian, my house is worth €250,000.”
The buyer tells me: “I am not paying more than €220,000.”
And then the valuer appears.
Who is right?

George: The valuer does not come along to decide who is right in a negotiation.
The role of a valuation is to reach a conclusion on value, based on the purpose of the valuation, the characteristics of the property, the information available and the applicable standards and methods.
The price an owner asks and the value resulting from a valuation report are different notions.

Lucian: How do you actually arrive at a value? Do you look at the property portals and see what everyone else is asking?

George: Market information matters, but the analysis is not simply averaging a set of listings.
The property has to be analysed, and information relevant to that particular market segment has to be identified.
Comparables have to be analysed and adjusted according to the relevant differences.

Lucian: Give me a few examples. Two houses are each 150 square metres. Why might they have different values?

George: Because floor area is only one characteristic.
The land matters, so does the location, the access, the utilities, the characteristics of the building, its age and condition, the layout, the documentation and other factors the market considers relevant.
Two properties with the same floor area are not automatically equivalent.

Lucian: In Ilfov we have an interesting situation. Sometimes two houses are relatively close together, but one has a tarmac road and all the utilities, while access to the other is more difficult.
Does that show up in the value?

George: If the market reacts differently to those characteristics, they can influence the analysis.
What the valuer tries to do is precisely to identify the elements market participants pay differently for.

Lucian: But the owner says: “My neighbour is asking €300,000. So my house is worth €300,000 too.”

George: The fact that someone asks a particular price does not automatically mean that is the level at which a transaction will be concluded.
An asking price is a piece of market information that has to be analysed in context.

Lucian: And the owner’s investments? “I put €40,000 into the pool, the kitchen and the fittings. I want to get it back.”

George: The cost of an investment does not necessarily transfer in full into market value.
You have to analyse the extent to which the market recognises that feature and is willing to pay for it.

Lucian: So a €20,000 kitchen does not automatically mean I add €20,000 to the price of the house.

George: Exactly. Cost and value are different concepts.

Lucian: There is another situation here that I come across quite often. The owner says: “I have two parking spaces, premium furniture, appliances, and I have made a lot of improvements.” Does all of that automatically go into the valuation of the property?

George: Not automatically. First of all, we have to establish exactly what the subject of the valuation is and what rights are recorded in the property documents. A property valuation considers the property and the rights that are actually the subject of the valuation.

For example, a parking space that is merely marked out or used by the owner, but is not registered as property and where no right over it follows from the documents, cannot simply be treated as an owned parking space and added to the value of the property.

In the same way, furniture, electronics and household appliances are ordinarily movable goods and should not be confused with the real estate being valued.

Lucian: But what if the owner has made significant improvements?

George: Improvements that form part of the property can be relevant, but they have to be analysed in relation to the property being valued and to the way the market recognises them. The fact that the owner spent a certain sum does not mean the same sum is automatically added to market value.

Lucian: So it is important to distinguish between what we are selling as a package and what the valuer can take into account as real estate.

George: Exactly. A transaction may include other goods or advantages for the buyer, but they have to be distinguished from the property right that is the subject of the valuation.

Lucian: What is your advice for an owner about to sell?

George: To try to look at the property from the market’s point of view as well, not only from the point of view of their personal investment and their attachment to it.

Lucian: That is very important. For the owner it is “my house”. For the market it is a property competing with other properties.