Real Estate
The human being is always at the center
Andreas Sorge, Partner
Accredited Real Estate Appraisals
Methods of real estate valuations
Learn all about the methods of real estate valuations to make informed decisions when buying, selling, or investing in properties. In this article, we introduce you to the three main methods: the comparative value method, the income approach, and the cost approach. Each method uses different approaches to determine the value of a property and offers specific advantages tailored to different types of properties and market conditions. Whether you want to estimate the market value of a residential property, calculate the return on an investment property, or determine the material value of a luxury villa, our detailed overview helps you understand and apply the respective methods.
1. Comparative value method – Market price through comparison of similar properties
Disadvantage: A statistic is only as good as its data basis, which is often inadequate in Switzerland. Different providers use various data and methods, which can lead to significant deviations—values often differ by up to 30%.
Advantages of the comparative value method
- Market-oriented: It provides a rough overview of the current real estate market.
- Fast and simple: Through the direct comparison of similar properties using databases and corresponding simplified input masks, the evaluation can be conducted swiftly.
- Realistic price range, within which the actual property value is highly likely to be found. The more data available, the narrower the price range. Unfortunately, in Switzerland, there is insufficient data to achieve high accuracy, hence the range is about 20%. The statistical auxiliary models (hedonic valuation) suggest the middle as the effective value.
- Possibilities for improvement: Apply several statistical methods in parallel and engage an appraiser. Based on the on-site inspection and their experience, the appraiser assesses within which part of the price range the realistic value of the property lies.
2. Income approach – Value determination through yield calculation
The income approach is primarily used for rented or commercial properties. It calculates the value based on expected income and expenses. The revenue from rental income or other earnings is compared to ongoing costs and the current, statistically derived capitalization interest rate. This allows for the determination of the long-term economic benefit of a property.
Advantages of the income approach
- Focus on yield: Ideal for investors who want to calculate the value of a property based on its income.
- Long-term perspective: The method considers the benefits over many years.
- Flexible: It can be applied to different life stages of a property.
3. Cost approach – value through substance
The cost approach is used for properties that are often owner-occupied or are considered luxury. It determines the value based on the construction costs and the condition of the property. The focus is on the actual material value, supplemented by the value of the land. This method represents the perspective of a potential buyer who is searching for their dream property.
Advantages of the cost approach
- Independent of statistics: The value is primarily determined by the building’s substance.
- Detailed: It also takes into account exceptional or unique features of the property.
- Stable: Less susceptible to short-term market fluctuations.
When an independent real estate valuation is advisable
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