Property Valuation When Buying a Home in New Development – What Should a Client Know?
Real estate valuation is necessary for various purposes such as financing, real estate buying and selling, investment analysis, property insurance, and taxation, but most importantly, its most critical application lies in home purchases with bank loans. An independent expert appraisal confirms to the homebuyer and the lender that the property is priced according to market level.
Purchasing a home with a loan is often one of the biggest decisions a family makes, which is why it is very important that the acquired property corresponds to the asked price, i.e., its market value. There are many appraisers, but today only a few pay attention to all the nuances of the property being valued in real time. Instead, most have stuck with the comparison method, which is based on sales prices of transactions registered with ownership agreements.
WHAT MAKES REAL ESTATE VALUATION COMPLEX?
Every development has unique characteristics: location, architecture, construction quality and class, landscape architecture, apartment layout and finishing, and common areas' amenities and functionality. The value of specific real estate is also affected by general real estate market trends, such as supply and demand in a given area. This means that if a new area is being developed, the entire concept of the development project plays a role, as do the developer's capability to realize it, construction costs, and the development's impact on surrounding areas and vice versa.
DOES THE VALUATION METHODOLOGY SERVE THE CLIENT'S INTERESTS?
To determine a fair market value, individual characteristics must be taken into account, otherwise the valuation becomes one-sided. What does this mean? Most often, the valued property is compared to other similar properties sold in the same area. For new apartments, this means comparing two non-comparable products. If comparable real estate exists in Tallinn's city center, Old Town, or waterfront residential areas, then for example in Kristiine City developed by Pro Kapital, such a comparison point with other developers' developments is lacking. This is a new residential quarter development that significantly increases the value of both this area and surrounding areas. For a new, modern, and quality-wise equivalent product to city center developments, which today is in the construction process or just beginning, there is no equivalent comparison in this area. In the case of Kristiine City, this means that the only comparable comparison for a pre-sale project is another project under construction in Kristiine City. The practice commonly used on the market does not take as a basis an object registered with a debt obligation contract. Rather, it compares already completed apartments for which ownership agreements have been registered. Thus, it can happen that a client purchases a home whose value is appraised by a real estate appraiser as lower than its actual market value, because previously completed projects' purchase prices were lower, as that transaction may have taken place even a year and a half earlier.
A fitting example to bring here would be car valuation, which only considers the year of manufacture, mileage, and model, while disregarding the model's special features, equipment, the car's power, and condition. This means that due to a one-sided unreasonable valuation practice, up to a third of the car's fair value is lost from its actual value. This is also a common practice today and certainly is not a methodology based on the client's interests.
For the client, it is important that the real estate market value corresponds to the price asked by the developer. Therefore, when financing a home purchase with a loan, the client should make sure which expert appraisals their chosen bank accepts. It is good to know that there are several professional appraisers on the Estonian market today who take into account various aspects of real estate development and compare comparable objects. There are also banks in the housing market that take such a multifaceted and fair approach into account.
Article source: Pro Kapital, Carmen Kukk, Sales and Marketing Director
