Real estate appraisal when buying a home in a new development – what should the client know?

October 12, 2020

Carmen Kukk Carmen Kukk
Head of Sales and Marketing

Real estate valuation is necessary for various endeavours such as financing, selling or buying real estate, investment analysis, property insurance and taxation, but in most cases its perhaps most useful application is when buying a home with a bank loan.

An independent expert assessment confirms to the home buyer and financier that the property has been priced according to the market level. Acquiring a home with a loan is often one of the biggest decisions for the family, which is why it is very important that the real estate to be bought corresponds to the price being asked or market value. There are many appraisers, but today few pay attention to all the nuances of real estate evaluated in real time. Rather, many still use to the comparison method, which is based, among other things, on the sales transaction prices in the law of property act.

What makes the real estate valuation process difficult?

Each development has unique features such as location, architecture, construction quality and class, landscape architecture, apartment planning and finishing, and the comforts and functionalities of common areas. The value of a particular property is also affected by general trends in the real estate market, such as supply and demand in the area. This means that when it comes to developing a new area, the whole concept of the development project, the developer’s ability to implement it, the construction cost and the impact of the development on the surrounding areas and vice versa, play a role.

Is the valuation methodology based on the client’s interests?

 In order to determine the rather fair value, project’s individual characteristics must be taken into account, otherwise the valuation will be one-sided. What does it mean? Most often, the real estate being evaluated, is compared with other similar properties sold in the same area. In the case of new developments, this often means comparing two non-comparable products. While there is comparable real estate in the centre of Tallinn, in the Old Town or in the residential areas by the sea, then, for example, in Kristiine City, developed by Pro Kapital, there are no such comparable development projects by other developers. This is a development of a new residential quarter which significantly increases the value of the area but also for the surrounding areas. However, there is no equivalent comparison in this area for a new, modern product comparable in quality to the city centre developments, the construction of which would either be in progress or soon to begin. In the case of Kristiine City, this means that the only approximate comparison to the new project in pre-sale, is another project under construction at Kristiine City. The practice often used in the market does not however consider projects formalised with the law of obligations act. Instead, it is compared to already built apartments formalised with the law of property act. Thus, the client may buy a home, which is evaluated lower than the actual market value only because the purchase and sale price of previously completed projects was lower due to fact the time of this transaction dates back a year and a half earlier.

To illustrate this one-sidedness, it would be appropriate to give an example of a car appraisal, which only takes into account the year of manufacture, mileage and model, without taking into account the specifics of the model, options, power and the condition of the car. This means that up to one third of the fair value of a car could be lost due to one-sided and unreasonable valuation practices alone. This is also a common practice today and is certainly not a methodology based on the interests of the client.

It is important for the client that the market value of the real estate corresponds to the price requested by the developer. Therefore, when financing a home purchase with a loan, the client should make sure which expert assessments his or her chosen bank accepts. It is good to know that there are several professional appraisers in the Estonian market who take into account different aspects of real estate development and compare comparable objects. There are also banks in the domestic market that take such a diverse and fair approach into account.