What is it?
The objective of every valuer is, with the greatest possible certainty and thoroughness, to reflect the value that the market attributes to properties at a given moment in time. To do so, valuers will arm themselves with the available information about the prices or profitability of comparable properties and will adequately process that information to infer the value of a property whose valuation has been requested.
Spanish legislation, when establishing the standards that must be followed by appraisal companies, defines the market value of a property as “the most likely price at which it could be sold in a private contract between a willing seller and an independent buyer (unrelated to the seller) on a certain date, under the hypothesis that the property had been publicly offered on the market, that neither of the two parties has a personal or professional interest in the transaction other than the actual sale, that the market conditions allow the orderly disposal of the same and that there was a normal time frame, thereby considering the nature of the immovable property, for negotiating the sale” (Article 4 of Ministerial Order ECO 805/2003, of 27 March).
This definition is in accordance with internationally accepted valuation standards, and as can be seen, it is subject to several hypotheses. This is due to the fact that the value of any property can vary depending on what is going to be estimated.
Other values of properties
Based on the definition of market value, we can observe that it is not useful for knowing the following (for example):
- How much would it cost us to replace that property if, for any reason, it were completely destroyed? To know this cost, we would have to calculate what is known s the replacement value, meaning the expenses that would be necessary to construct an immovable property of the same characteristics.
- How much would be earned by the seller who puts the property up for sale? To calculate this amount, it would be necessary to discount, from the most likely price of sale, the taxes that the seller would have to pay for selling the asset or the expenses that would be borne when placing it on the market (for example through an agency, as it is commonly done).
- What would be the price if the seller had to sell the property quickly? Such an operation would be called liquidation of the property, and when it occurs, the seller would be willing to accept less money (liquidation value) than if they had a reasonable period of time to conduct an orderly sale, meaning time to wait for the best buyer.
- What would be the market price of the property within a few years? In this case, the estimate will most certainly be less accurate than the present value. Moreover, the valuer must have good knowledge of trends in the corresponding local market (meaning of the city where the property is located) and should eliminate, from the current price, any supply or demand factor that they think is not going to exist in the future for that type of property.
- What value of a property is used by the administration as the taxable base? Depending on the type of tax in question, the corresponding legislation will establish how the value of a property should be determined, which in some cases will be the same as the market value and in others it will not. The same thing will happen for many other purposes (compulsory sales, expropriations, etc.), for which the methodology and the final value given to the property could differ from that of the market value.
And the fact is, in brief, that a property could have different values according to the purpose for which the valuation is made. And in each case, the valuer will adapt the methodology according to the client’s needs, to whom the valuer must explain, as clearly as possible, not only the nature of the value being estimated by the appraisal but also the limits of the same.
In Spain, when a valuation is made to establish a mortgage loan, appraisal companies must make a prudent estimate of the minimum value that the property could reach in the future. To do so, they must consider the future marketability of the property, they must take into account the long-term sustainable aspects, they must consider normal and local market conditions, they must consider the current use and alternative appropriate uses, and they must exclude speculative elements from the value (which are elements originating from behaviours that try to benefit in the short term from price fluctuations, from expectations of a change of use or buildability or other extraordinary factors that are not sustainable in the future).
This value, which in Spain and the EU is called the mortgage value, can be different from the market value at a given moment in time, especially if the market price is dropping and is expected to continue that way in upcoming years.
Regardless, for any purpose, a valuation must always be done by a trained and expert valuer. In Spain, the vast majority of valuations are done by appraisal companies, which are subject to very rigorous regulations.