## Requirements for evaluating a property

## Price formation

The market price is the meeting between supply and demand and is created based on the different economic situations present at that time. Supply and demand affect values: as **demand increases, prices increase** in the short term. But in the long run, any increase in supply (for example the presence of new buildings) decreases prices. For this reason, those who want to sell a house today cannot expect a revaluation over time, precisely because every day the supply of products for sale is greater than the demand.

## What is the market value

Market value is the **most likely price** that an asset can earn **during free trading **such as in the case of** ****certain and historical** fact, a fact that took place in that market at a precise moment.

By free bargaining we mean a negotiation in which the seller is not in economic difficulty, which otherwise would lead to a decrease in prices. Furthermore, in order to delineate the real value, the market must be liquid, that is, with adequate trading volumes. Otherwise it would be impossible to delineate a correct value. For example, if your neighbor sold at a lower price than the real value because he was in financial difficulty, that value should not be considered for fair bargaining.

The way in which the value of a property is attributed must be based on a solid method, which takes its cue from the **principle of ordinariness. **Basically it is based on the comparison of **similar goods under the same conditions**. For example, if you want to evaluate an apartment similar to those already sold, but without the flooring, you will have to evaluate it as if it were in ordinary condition. And only then deduct the cost of installing the flooring from the determined value.

## Additions and deductions

In the formula of how to evaluate a property you will also find additions and deductions. These are additions or subtractions related to **improvements or worsening. **Let’s take some examples.

Anything that leads to an improvement in real estate value can be added:

- home automation;
- electric gate;
- new fixtures;
- new plumbing and electrical systems;
- and so on

Anything that involves a worsening of the real estate value can be an example of deductions:

- arrears of condominium fees;
- need for painting interventions;
- systems to be redone;
- and so on

As you will see shortly, the additions and deductions must be added or subtracted at the end of the evaluation.

## Difference between comparative method and evaluation by coefficients

The estimation methods are many and depend on the purpose. What interests us is how to calculate the value of a house to buy or sell it and therefore we must **distinguish the two** main **methods** of estimation.

**The comparative estimate is the most reliable and truthful. **It is based on the comparison of other properties similar to yours and already sold recently in the same area. On the other hand, however, it is necessary to know the real prices of sales and it is sometimes difficult to find data (but after we see where to find them).

Instead, the **evaluation by coefficients is easier and more accessible** but certainly less reliable. You can easily find the data from the Revenue Agency website, multiply them by the corrective coefficients, thus finding the valuation per square meter. However, they are not always reliable as we will see very soon.

## The information sources where to find the prices

One of the most difficult steps on how to evaluate a house is perhaps precisely that of **finding the prices** of the past sale. A little while ago we saw that the best estimate is that by comparison but without the exact knowledge of the sale prices it is not possible to perform it. If you do not find the prices you will have to rely on the OMI values and apply the relative coefficients, a less qualitative choice. Here is where you can find information always **respecting privacy**:

- asking real estate agencies (if they let you);
- with other operators in the sector who are aware of the real values;
- with notaries;
- publication in specialized newspapers or magazines;
- on the site of stimatrix.it (but at a considerable cost)
- free of charge at the values declared by the Revenue Agency
- alternatively referring to the OMI values (but less precise) *

* Although OMI values are widely used for their convenience of access, they are not suitable for a comparative estimate because they are statistical data. Similar to how to say that an older person is normally between 150cm and 190cm tall. Statistically it takes us, and it’s the same with OMI values. That’s why corrections need to be made, which is easier said than done.

## Who is in charge of making real estate estimates?

This guide wants to help you understand how to evaluate a property even without the help of a professional, because once you understand the procedure you can do it yourself. But the more you delve into specific issues, the more experience helps. For this reason there are **qualified professionals. **These are typically **real estate appraisers** and local market experts such as brokers who deal with them on a daily basis. If you turn to a professional figure, always remember to ask which method was used and to show you the data.

## How to do the calculations

Now that you have a clearer idea, it’s time to see how. We talked about the difference of the two methods before, let’s see them both. Let’s start with the mathematical formula offered to us by real estate appraisal. Then let’s proceed with the application of the same and see some examples.

## The mathematical formula

The official formula deriving from the real estate appraisal for the calculation of the value is the following: the value is equal to the sum of the prices of the other houses divided by the sum of the total area of all the houses multiplied by the surface of the house to be evaluated. Finally, it is necessary to add or subtract the relative additions or deductions. Let’s see the formula of how to evaluate a house with **a comparative method:**

*Market value (comparative method) = (value per square meter x surface) +/- additions and deductions **

* Additions and deductions are those improving or pejorative characteristics to be added or subtracted as the last step.

I always suggest you to use the declared values of sale that you can find on the website of the **park view city Islamabad****. **But if they are not available you will have to consult the OMI ones, easier to obtain but less precise. At this point, however, it is no longer a question of the comparative method but we pass to the method by coefficients and therefore the **formula** also **changes.**

*Market value (coefficient method) = [(OMI values * coefficients of merit) x dwelling area] +/- additions and deductions*

We will shortly make two examples to evaluate the same house but with the two different methods and you will notice a substantial difference.

## Determine the value of a new home

Perhaps you have never thought about it but new buildings, that is those built within the previous **10 years**, **influence the market values** and therefore those of all the other neighboring real estate assets. The new buildings adopt construction techniques and technologies that improve both energy efficiency and seismic safety.

To determine its value, the construction company will have to calculate the cost of construction, that of the purchase of the land, labor and material. It must also take into account the unsold risk and finally calculate its markup. All this obviously means that in the end, with the same surface area, a new property costs more than the used one.

If you do not find the prices per square meter of new houses, you can still use those of the renovated houses. However, remember that in case of need you will have to apply the relative additions or deductions.

## How to evaluate a used property but in good condition

When it comes to used properties (as often happens), the analysis of the value is easier. In fact, it is possible to rely on a much wider list of comparable, especially in cities. It is defined as a used house but still in good condition when it is between 11 and 30 years old. The systems and the style are not that old yet and all in all in good condition even if not updated to current standards.

To evaluate a used house then you can start from the price of the new one and **subtract the related costs** for improvements or compare it with other similar ones (as seen before).

For example, if a new apartment was sold for 150,000 euros, then you can assume that the value of a very similar apartment in the same neighborhood is the same **minus a moderate devaluation**. It is not possible to apply univocal indices because they vary from case to case but the devaluation is about 10/15%.

## How to find the value of a house to renovate

As you can imagine, it is logical to deduce that the valuation of a property to be redone must take into account the **renovation costs. **But it is not linear, that is, **the devaluation** that an old house undergoes **is not equal to the only cost** it takes to bring it to new.

You can deduct the renovation costs from the value of the new one, thus obtaining how much a house to renovate is worth, but it is not enough. In fact, consider that frequently those who visit a run-down property feel an **unpleasant perception** and this leads to a devaluation that exceeds the costs. This is why it is generally difficult to sell a property to renovate at the same appraisal value. The fear of having to invest money in unforeseen **renovation costs** devalues the real estate unit even more. The formula is as follows:

*Value of a house to renovate = (value per square meter x surface) – renovation costs *

## Real estate valuation example

If we have seen theory and formulas before, now is the time to give **practical examples. **Let’s pretend that we have to calculate the value of an apartment located in via Perugia and apply the two methods seen above (comparative and analytical).

Property | Location | State | Sam | Rooms | Bathrooms | Sold to | € / Sam |

app. to be evaluated | via Arcobaleno | normal | 88 | 2 | 2 | – | – |

apartment | via Arcobaleno | normal | 93 | 3 | 2 | 205,000 | € 2,200 / sqm |

apartment | via Evergreen | normal | 75 | 2 | 1 | 183,000 | € 2,450 / sqm |

apartment | via Luna | renovated | 69 | 2 | 2 | 185,000 | € 2.680 / sqm |

Value € / sqm | € 2,440 / sqm |

## Example of real estate value calculation with comparative method

Property | Location | State | Sqm | Rooms | Bathrooms | Sold to | € / Sqm |

app. to be evaluated | via Arcobaleno | normal | 88 | 2 | 2 | – | – |

apartment | via Arcobaleno | normal | 93 | 3 | 2 | 205,000 | € 2,200 / sqm |

apartment | via Evergreen | normal | 75 | 2 | 1 | 183,000 | € 2,450 / sqm |

apartment | via Luna | renovated | 69 | 2 | 2 | 185,000 | € 2.680 / sqm |

Value € / sqm | € 2,440 / sqm |

First of all, prepare a table and identify the location of the property to be estimated (in this example it will be via Arcobaleno).

Then you need to find at least 3 similar properties recently sold in the same area. Of particular importance, among the main factors are the state of conservation, size, number of bedrooms and bathrooms. Finally fill in the table and find the average price per square meter, as in the example.

Now that you have the data, you can estimate that the apartment in the example of 88 square meters in via Arcobaleno has a value of around € 215,000. At this point you will add or subtract the additions and deductions. Recognize that the more similar the comparable, the better the accuracy of the estimate.

If you do not have comparable, you can find them on the Agenzia delle Entrate website at the link of the declared values but you will need to log in electronically at Fisconline / Entratel.

Now let’s see the example with the same property but through the analytical method.

## Example of real estate value calculation with analytical method

As mentioned above, the analytical method is applied when it is not possible to use the comparative method. In fact, this method offers free access to statistical data but is also more approximate.

In this example you must use the OMI values (source Agenzia Delle Entrate) by going to this link and following the instructions. You will find two values, one of maximum and one of minimum, which as mentioned are statistical numbers. Secondly, you must then take the average and apply the coefficients of merit.

Property | Location | State | Sqm | Maximum | Minimum | OMI media |

app. to be evaluated | via Arcobaleno | normal | 88 | € 2.700 / sqm | € 2,000 / sqm | € 2,350 / sqm |

In this case it is good to make the average of the OMI values as the state of conservation of the property in example is normal. Subsequently we proceed with the application of the coefficients of merit (for square footage, exposure, floor, heating and so on).

Simplifying in this example to the average price of € 2,350 we apply the coefficient -0.5% relative to the surface, finding a value of approximately € 2,230 / sqm. Finally, we multiply the 88 meters by 2,230, obtaining an estimated value of approximately 196,000 euros in total.

As you can see, **the valuation per square meter varies according to the estimation method used. **In our example there is a difference of 19,000 euros (215,000 – 196,000).

## Mistakes to avoid

### Do not consider the differences

The first mistake to avoid is not to consider the differences. Most of the properties, especially older ones, have something wrong with them. As long as the discrepancy is slight, the valuation also deviates little or nothing, vice versa with an important discrepancy. For example, one thing is that there is a “removable” veranda, another thing is that there is a real increase in airspace that makes the property or part of it illegal. The error arises if in evaluating the house you do not count these expenses.

### Based on the “asking price”

The second mistake is to **rely on asking** prices. Do not base your property valuation on what you see on other listings as the asking price is not the correct value. In fact, the discount range between the asking price and the selling price **can vary between 5% and 30%. **As previously said, reliable data is needed. Relying on asking prices is a **fatal mistake.**

## Unsuitable comparable

The third mistake is to consider comparable not close to the property to be estimated. Perhaps in neighborhoods with different market dynamics, or different types of properties. If you rate an apartment you have to compare it to other apartments and the same with villas. But you can’t mix things up because they have different quotes.

## Apply the coefficients of merit

As seen above, if you use the analytical estimation method you must use particular **coefficients of merit** that serve to **improve its accuracy. **Also known as ameliorative or corrective coefficients, they were born from the provision of the Revenue Agency in July 2007.

Multipliers vary based on:

– **Surface **of **the** property;

– state of **conservation**;

– entrance **floor; **

– **exhibition; **

– **heating**

Compared to the evaluation by comparison (which is always to be preferred) the application of the coefficients of merit **is an alternative**. We start from the average market values multiplied by the corrective multipliers (K) and finally, for the surface, they identify the value of the property. The formula is as follows:

*Normal OMI value per m2 = min OMI value + (max OMI value – min OMI value) * K.*

Where K is defined as the correction coefficient.

Let’s go back to our example of the 88 sq. m building in via Arcobaleno with a minimum value of € 2,000 and a maximum of € 2,700. Therefore the formula with the corrective indices will be the following: 2.000 + (2.700-2.000) * K. As you will see below in the table of coefficients K it depends on the surface and the level of the floor.

## Tables of the coefficients of merit of the properties (source: Agenzia Entrate)

Surface | Coefficient (K) |

up to 45 sqm | 1 |

from 45 to 70 sqm | 0.8 |

from 70 to 120 sqm | 0.5 |

from 120 to 150 sqm | 0.3 |

over 150 square meters | 0 |

Floor level | Coefficient (K) |

basement | 0 |

ground | 0.2 |

first | 0.4 |

intermediate | 0.5 |

last | 0.8 |

attic | 1 |

## Other less used ways to find the value of a home

Normally the methods on how to evaluate the house are those seen previously, but there can also be another one that is the **indirect calculation thanks to the rental income. **This method is normally used by investors, who have a greater interest in evaluating the ROI (return on investment).

## Estimate by capitalization

The capitalization estimate is calculated on the basis of the lease of a property. To value a property from rental income, you must **divide the annual rent by the annual ROI. **The ROI in this case is the annual return on the rent, that is, the monthly rent multiplied by twelve months. The formula is as follows:

*Property value = annual rent / ROI*

For example, if you are renting a two-room apartment at the annual fee of € 6,000 (€ 500 / month), dividing it by the ROI you will find its value. However, the return on investment is not standard and depends on the factors that influence the value of the property. Let’s consider in our example an ROI of 4.5%, this means that the value of the apartment is € 133,333. In fact € 6.000 / 0.045 = 133.333.

## Further information

I hope that said it was useful to you. But there are still some insights to do if you want to know exactly how to value a property. In particular, it is necessary to investigate the conservation status and the rule of law. You may want to know how to evaluate a new home or how to evaluate one to be redone. Or, how much is a currently rented apartment worth on the market? In these cases, the comparison method seen so far is always the preferable one, but there are further considerations to be made. Let’s see them specifically below.

## Factors affecting the value

Well let’s go into the theme and see how to evaluate a house. Let’s talk about the **factors that influence the value of real estate**

In particular, these are intrinsic factors such as:

- square footage;
- subdivision of spaces;
- brightness;
- exposure;
- energy performance;
- state of conservation;
- privacy;
- external view

But also extrinsic factors such as:

- wholesomeness of the air;
- neighborhood safety;
- proximity to services;
- presence of bus stops;
- presence of nearby shopping centers;
- overlooking closed or busy roads;

These factors have a decisive influence on the value of a home but **it is not always possible to calculate their incidence. **Especially for external factors on which it is not possible to intervene.

## How much does it cost to have a house appraised?

Precisely due to the fact that the identification of the correct real estate value requires time and specific knowledge as we have seen above, the cost of a real estate valuation can be **between 50 to 150 euros** if done through an expert or even more if it is a sworn appraisal. . On the other hand, many real estate agencies offer **free but less detailed** valuations.

Read More:

## The different types of real estate estimates

*The most probable market value*

This is the most likely price that your property could raise during a **free negotiation**. In this article we have discussed in detail how to evaluate a house to sell it, talking about this type of real estate appraisal.

*Cost value*

This is the cost related to the creation/construction of the asset. In practice, they are the sum of living costs, such as excavation, labor, individual bricks, etc. Obviously, the cost value differs from the market value. For example, the cost of the builder to build a new house.

*Cost of transformation*

The transformation value is the difference between the market value once the asset has been transformed, minus the cost of its transformation. For example, how much will your home be worth after the renovation? From the post-renovation value, subtract the costs to obtain the transformation value.

*Complementary*

This is the difference between the market value of the entire asset minus the value of the excluded part, as is the case with the estimates of compensation for expropriation. For example, my father was reimbursed for the expropriation of a piece of land in order to build a public work.

*Subrogation*

This is the market value of an asset that replaces the asset being valued. For example, estimates of industrial plants.

## Because real estate estimates give different results

Frequently, if you ask several professionals what the value of the home is, for example from a real estate agency, a technician and an online real estate appraisal software, **the results obtained may be different.**

A slight deviation is normal but if the deviation is too strong it means that **different parameters** have been adopted. We have seen that the data to be used to make a property valuation are the prices of similar properties already sold. The solution is to ask who made the estimation which parameters and which estimation method was used.

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