A real estate study must be conducted under certain parameters in order to determine the value of the property we are appraising.
In the professional context of the real estate sector, a real estate market study is not just a technical appraisal, but a key strategic tool for buying, selling, or investing wisely. It allows for the analysis of the actual market behavior, detection of opportunities, adjustment of listing prices, and reduction of the time to sell a property. Therefore, understanding how to correctly conduct a real estate study is fundamental for both individuals and investors and real estate agents.
The main objective of a real estate study is to establish a value for the property under current market conditions.
But how is a real estate study conducted effectively? At Gumper, we explain the process of real estate valuation.
The process of the real estate study
The first thing we need to do, whether we are buyers or sellers of a property, is to have a clear understanding of the value of that asset in the current market. There are multiple ways to do this. Although it may seem simple, real estate studies require extensive knowledge as they encompass different disciplines depending on the condition of the property being evaluated.
When analyzing how to correctly conduct a real estate market study, it is important to understand that there is no single valid method. The combination of comparative valuation, replacement cost, and supply-demand analysis allows for a much more accurate view of the real value of a property. This hybrid approach is what professionals use to avoid errors of overvaluation or undervaluation that can directly affect the profitability of the transaction.
The first thing we need to know is what we want to study; for example, if we wish to evaluate the appraisal of a property, we should follow the formula known as CRB.
This formula, also known as gross replacement cost, is formulated as equal to the total land cost plus the construction cost plus necessary expenses and recoverable elements.
If we take that formula as a reference, we can determine that the gross replacement or new replacement value of a property is the sum of all investments and assets necessary to construct, at the date of valuation, a property with the same characteristics, referring to the same functionality in terms of utility, square meters, use, but using current construction materials.
This type of real estate study is usually conducted mainly among properties that are in a construction and rehabilitation process.
Once we have this referred value, we must add the following method, as the result cannot be above the market value, otherwise we would be in a poorly effective real estate valuation.
How do I calculate the concepts of the CBR?
We have discussed the formula for the gross replacement cost, but we must calculate the value of each of the variables. To do this, we will determine:
- Land value: The comparison method, which we will discuss later, will be the chosen one for this type of study. We can determine a value in euros per square meter based on the operability of the land. For example, if it is a buildable plot or if, on the contrary, it is a plot intended for industrial use.
- Building: Any building that we believe will incur construction costs known as contract costs, which include project development, general expenses, the contractor’s industrial profit, and the costs of executing materials.
The easiest ways to perform this calculation are to request it directly from the developer or builder. There are professional or specialized publications that in some specific cases can help us execute a strategy for gathering information and comparison. - Production costs or necessary expenses: If you are in the real estate environment, you will have already discovered that a series of expenses derived from property management are usually generated. Therefore, taxes, technical fees, licensing costs, rates, or administrative expenses that do not generate profit for the developer must also be taken into account.
This technical approach to the real estate study is especially relevant in dynamic markets like the Spanish one, where land value and demand can vary significantly even within the same city. Therefore, real estate professionals constantly update their cost references and comparables to ensure that the valuation reflects the current reality of the market.
The process of the real estate study: the comparison as a starting point
Much has been said about the law 11/2020 regulation that highlighted the regulation of rental prices in Catalonia. While we are currently focusing this article from a more sales-oriented point of view, when we carry out a valuation of a property and its corresponding real estate study, we must look beyond territorial regulation and initiate a process called: comparative valuation.
What do I need to know about the comparative valuation of a property?
The comparative method is the most commonly used when conducting a study about the value of the property. What we can commonly refer to as real estate appraisal if we want to be more precise.
The steps followed to carry out this real estate study are as follows:
- Documentation of the property for the study: The first part of the process of a comparative valuation is the collection by the appraiser of the property’s documentation. The most common practice is to request a simple note from the property registry to verify the information provided by the interested party. It is advisable at this point to carry out the exercise of comparing the provided documentation and ensuring that everything is regulated between the deed, the land registry, and the urban planning regulations that affect the property.
- Visit to the property: Once we have proceeded with the analysis of the documentation and carried out the various checks, a visit to the property is made so that we can verify that the property corresponds to its documentation and we can also evaluate in situ the quality and composition of the different materials, have a perception of the environment, conservation, utilities, and space of the property.
In a professional real estate market study, the analysis not only focuses on the objective data of the property but also on external factors such as price evolution in the area, average sales speed, and the behavior of active buyers. These indicators allow for adjusting the commercial strategy and maximizing the probability of closing at an optimal price.
Value is a priority when it comes to closing the sale. Keep in mind that prices adjust to logical possibilities, depending on location, type of property, condition of the home, the environment where it is located, height, orientation, surface area, distribution, whether it is exterior and to what extent, and any legal limitations that the property may have, etc. The personal perception one has of the property may differ from the objective reality of the market.
The determination of the real market price is influenced by other variables, such as supply and demand in the target market for that specific type of product, the closing prices of homes in the last six months for similar homes, the number of homes sold, (these data obtained through public bodies such as the Ministry of Development, Generalitat de Catalunya, and the Official College of Notaries and Registrars), the price and type of newly built housing in the area, and also based on improvements valued by the market which may have corrective coefficients.
What is not the basis for your home’s value?
- What you need to sell.
- What you have spent on it. There are renovations that add value to the house and others that do not or that can even decrease its value.
- What you want.
- What the one you are going to buy is worth.
- What a neighbor told you.
- Your feelings towards it, remember that what you have experienced in that property has nothing to do with what the buyer perceives.
What is the value of your home based on?
- The current market.
- The similar offers to yours.
- The specific offer for your type of housing in the area.
- The current financing.
- The condition of the property.
- The buyer’s perception.
- The location, area, height…
- The positioning of the property for sale in the market.
- The sales system used can speed up the selling time and increase the price.
If you want us to conduct a real estate study of your property, you can contact us. We have extensive experience in the real estate market and a long history that allows us to advise you from the experience and background of having managed countless properties in our years of professional practice.
When conducting a real estate study, it is important to choose a trusted professional who can provide you with added value and knowledge so that the result is as accurate as possible, as your success capacity or your buying decision may be influenced by it.
At Gumper, we will conduct a serious and professional comparative market analysis, taking into account multiple variables so that you can sell your home for the highest possible price in the shortest possible time.
Currently in the market, it is not that there are few buyers, but that there are few homes at their fair market price and presented in an appealing way considering the target socioeconomic population to whom it is directed.
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