When you look online at the various Spanish property portals you will find a wide range of prices for what seem to be, at first sight, similar properties. You might come to the conclusion that someone has just picked a number out of the air and decided to list it at that price and, at times, you'd be right! Many times the owner says "I want X" and the agent says OK. No pushback, no valuing, no advice on the market value, nothing. They list the property in the hope that someone comes along and buys it fresh off the banana boat and, at times again, it works.
Therefore today we are going to look at how to find out how much a Spanish property is worth using data available online. One thing though. We are going to use an example that demonstrates how bad these methods are. There is such a variation in the valuations given, that you seriously need to ask how these tools are using the data they are choosing in order to value.
The Various Valuation Methods
Here are the most common methods used in valuing Spanish Property. We will comment on them further down the article
1. Comparative Market Analysis (CMA)
- Description: This method involves comparing the property with similar properties (comparables or "comps") that have recently been sold or are currently on the market in the same area.
- Use Case: Commonly used for residential properties.
- Factors Considered: Location, size, condition, age, and features of the property.
- Advantages: Relatively simple and reflects current market conditions.
- Limitations: Requires access to accurate and up-to-date sales data.
2. Cost Approach
- Description: This method estimates the value of the property by calculating the cost to replace or reproduce the property, minus depreciation, plus the value of the land.
- Use Case: Often used for new or unique properties where comparable sales are scarce.
- Factors Considered: Construction costs, land value, and depreciation.
- Advantages: Useful for insurance purposes and new constructions.
- Limitations: May not reflect market value if the property is not new.
3. Income Approach
- Description: This method values the property based on the income it generates, typically used for rental properties or commercial real estate.
- Use Case: Commonly used for investment properties.
- Factors Considered: Rental income, operating expenses, vacancy rates, and capitalization rates.
- Advantages: Reflects the investment potential of the property.
- Limitations: Requires accurate income and expense data.
4. Residual Method
- Description: This method is used for development projects and calculates the value of the land based on the potential development value minus the development costs.
- Use Case: Used for undeveloped land or properties with development potential.
- Factors Considered: Development costs, expected sale prices of the developed properties, and profit margins.
- Advantages: Useful for assessing development potential.
- Limitations: Highly speculative and dependent on market conditions.
5. Automated Valuation Models (AVMs)
- Description: These are computer algorithms that analyze data from various sources to estimate property values.
- Use Case: Often used for quick valuations, such as for mortgage approvals.
- Factors Considered: Recent sales data, property characteristics, and market trends.
- Advantages: Fast and cost-effective.
- Limitations: May not account for unique property features or local market nuances.
6. Professional Appraisal
- Description: A licensed appraiser conducts a thorough inspection and analysis of the property.
- Use Case: Required for mortgage approvals, legal disputes, and high-value transactions.
- Factors Considered: Comprehensive analysis including market conditions, property condition, and comparable sales.
- Advantages: Highly accurate and reliable.
- Limitations: More expensive and time-consuming than other methods.
7. Catastral Value
- Description: This is the value assigned by the Spanish government for tax purposes, recorded in the Catastro (land registry).
- Use Case: Used for calculating property taxes and other official purposes.
- Factors Considered: Location, size, and use of the property.
- Advantages: Official and standardized.
- Limitations: Often lower than market value and not always updated regularly.
8. Bank Valuation
- Description: Conducted by banks to determine the value of a property for mortgage purposes.
- Use Case: Required when applying for a mortgage.
- Factors Considered: Similar to a professional appraisal but may be more conservative.
- Advantages: Required for financing.
- Limitations: May be lower than market value to protect the bank's interests.
Conclusion
The method chosen for valuing Spanish property depends on the type of property, the purpose of the valuation, and the available data. For the most accurate and reliable valuation, a professional appraisal is often recommended, especially for high-value or complex properties. So we'll move onto the practicalities now as opposed to the theory of valuation but before that just one caveat on the income approach. All methods have caveats but this is an important one in the context of the Spanish market as it's a total con we see now and again.
Caveat: The Income Approach
One of the caveats of the income approach mentioned above is to be very careful when buying a property that has been valued in this way. This is usually done in commercial real estate where rents are tied in for long time periods and it costs a tenant a lot of money to move away from their location.
In the residential market you may find the following problem and it's a con. An owner might be selling a property for 200k and the current tenants are paying 1700 Euros per month meaning a great percentage return of around 10%. However, in many cases that tenant is a friend whose contract is a year and they can leave after six months with no penalty and in certain cases the owner is not receiving the money, they have just signed a contract showing it to a prospective buyer. The true rental value might only be 800 Euros for example, giving a much lower return. The usual caveat applies, if something looks too good to be true then it usually is. Think about it though as rents tend to rise over time and your outlay will remain the same. It could be that in ten years time the rent is that initial amount.
Valuing Property For a Mortgage
When you are applying for a mortgage the bank sends a valuer around who has a quick look at the property, takes a few photos, does a drawing (Yes, a drawing) to get a rough plan and maybe takes a few measurements. They then disappear and a days or couple of weeks later you have a 30-60 page valuation, voila!
How do they value it though? There is something mentioned above which is Comparative Market Analysis and this is done through taking the details from two sources of data, values of properties sold recently in the area via the notarys' portal and asking prices in the local area advertised on property portals. And there are problems with both of these methods.
Nevertheless they often give an accurate assessment because firstly, notary values are often lower as these are properties sold in the past, even if recently, and in a country where black money is still a thing then the reported price may not have been the real price. On the other hand "asking prices" are often higher because they include people putting "Optimistic" prices on their property on the portals and agents allowing them to.
Why The Comparative Method Fails
Oftentimes though they are out by a large margin because ether there are few sales to compare to in the local area, this is the case of small towns and villages for example, or there are few other places for sale that are comparable locally. An example of this might be a modernised townhouse in a village being well above all of the other prices for sale because the other properties need a full reform and in many cases demolition.
Valuing Property For Information Purposes
This is where it gets interesting. We often get asked to come in and value a property because the owner "may decide to sell". This happens to a lot of other agents as well. The typical agent will come round, blow some smoke up the backside of an owner and give them a ridiculously optimistic valuation in the hope of getting a listing which they will sign an exclusive for a year "Because only I can sell it". (They'll then spend the next six months calling the owner to tell them to drop their price while keeping the listing and if it were true that they were the only one who could sell it then they wouldn't need a year's exclusive!)
You can also get a valuation from online tools but these are even further away from the truth in many cases. Today we are going to look at a property in La Pobla de Vallbona, mine, and the differing valuations given by online sources.
Bank Apps
If you have a bank in Spain then that bank will have an app which you can have on your phone. On that app there is a property valuation tool where you put in the details of the property and it gives you a random number that bears no relationship to market reality in my experience. The property we are using in this case is mine which would have a current market value of around 320-330k.
However my bank app says 158k and that it has gone down by 26% in the last year! Show me one property in Spain which has gone down by that amount in the last year and I'll show you a bomb site. (Just to demonstrate that I'm not bitter here I have another property which I bought last year for 120K, a small apartment, and the bank app says it's worth 218K which is just as wrong but in the other direction).
The funny thing here is that I went into the bank and mentioned this discrepancy to my advisor in the branch and they used the bank's own tool and came up with a price of 208k so it gives a different answer on supposedly the same data within the branch and bank app. It's still very wrong. However, I could see the comparisons it was using and there were ten of them. Eight of them were apartments of which three needed full modernisation and two were social housing with limited prices. The two that were actual houses, a more valid comparison, were just over half the size and one of them I have visited with a client and decided, no way. Also the owner wants almost half the payment in black money which, if he finds a mug willing to buy it under those conditions, will undermine the comparative method even more.
Online Property Portals
Looking at online property portals such as Idealista, Fotocasa, Pisos and more we also found a wide disparity. The highest estimation was Fotocasa with a range of 345-353k. They also give a percentage chance of this being an accurate valuation due to having many or few comparables and information and that was 79% accurate. Idealista gave a range of 195-245k. Valoración.es gave a range of 121-164K (Which is laughable), Kutxabank's portal gave a valuation of 256K and Real Advisor came up with 276K with a range of 262-296K. The funniest one was Habitaclia which gave a similar estimation to Real Advisor on the valuation for sale but estimated that the monthly rental would be 9304 Euros per month. If that were the case I'd move out tomorrow and rent it out and lounge around in a hammock for the rest of my life.
So 121k-353K. What did I say earlier about picking a number out of the sky? You can see that this is just totally random despite all of these companies mentioning they use AI, the best tools, the best comparatives etc... It's BS.
The Reference Value
One value not mentioned in the above examples is the Reference Value and this is an important one which is overlooked, quite rightly in many cases but as it's important we'll talk about it here. The reference value is a value attributed to the property by the property registry, supposedly what a property is worth just like all of the other valuations. However the reference value is extremely important because this is the value that the tax you pay on a property is based on... IF... it is higher than the price you are paying. You might buy for 180k for example but the reference value is 200k. This means the tax you pay on purchase will be a percentage of that higher value so you need to know the reference value to work out your costs of purchase. If the reference value is lower then you would pay on the 180k paid price.
Now here's the problem. The reference values for properties are all over the place. We usually find they are below the sales price which is good as the tax is paid on the real price not some notional value dreamt up by the registry. However at times we find higher reference values and you as a buyer, and also as a seller, need to know this because taxes for both parties are worked out via this valuation when higher!
Get a Valuation From Valencia Property
If you want to sell your property and want a clear valuation on it then contact us at Valencia Property and we will take a look. If we don't think it will work for our clients we won't waste your time, for example if it's outside our area or if it's the type of property our clients are not looking for.
If you then decide to sell your property then we can give you the best service including a full photo package, floor plans, virtual walkthrough and more. We are always looking for more property to list and have an almost 100% hit rate of selling the properties we are given and that's because we don't just take on anything at any price.
We don't want to give owners false expectations while at the same time our valuations are realistic. If you as an owner are realistic then we can work together. Also, we will always ask you what you are expecting to get for the property first because if that is well out of line with market values then we won't bother you with a visit. It's wasting our time and your time. There are other agencies out there who may give you a higher price but usually that's where the blowing smoke up an owner's backside comes in. We are realistic without lowballing you, while at the same time proactive in selling the properties we are given and we won't ask you for an exclusive to sell the property. You can read more about our selling service by clicking on the image below.
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