Different methods of assessment are used by experts. They are used as necessary, either alone, combined and/or weighted between the methods.
In difficult cases, the expert balances his own instinctive vision (and his professional responsibility), where the usual methods are not sufficient (see the paragraph below entitled Particular Cases: the assessment of buildings which are unique, atypical, polluted or damaged)
THE METHOD BY DIRECT COMPARISON
This method is the most usual and the easiest to peform.
It consists of obtaining (from the authorities or from competent professionals) details of applicable prices (buildings of the same nature, quality, location, in the same condition,), re recent transactions, to generate an average per square meter value.
The evaluation of the venal value of real estate, by the direct comparison method, thus takes into account a range of positive or negative, quantitative and qualitative (surface, quality of the site and the view, sunshine, quality of the construction, facilities and comfort, state of repair, use,) criteria, for a market in a friendly sale.
Elements of comparison are thus sought-after for very similar assets or, if not directly comparable, in the market, in the appropriate sector.
This theoretical average value is then applied to the assets to value them, weighted on their specific characteristics.
This method is often used in addition to the method by direct comparison by capitalization of the income (to obtain a theoretical average value).
THE METHOD BY CAPITALIZATION OF INCOME
This method consists in taking into account what an investor would consider to be a reasonable return on investment on similar assets.
The theoretical patrimonial value, of the assets under consideration, is extrapolated by the reasonable rate of return and compared to the income or potential income of the asset.
This method applies, either to assets effectively rented (actual rent), or for assets for which it is more practical to find some references on the rental market than on sale market.
This method is often used in addition to the method by direct comparison (to obtain a theoretical average value).
The method by capitalization of income can also be the embryonic basis of a legitimate return on investment, as evidenced by the discounted cash flow (DCF), described below.
THE REAL ESTATE DEVELOPER PROMOTER
The real estate developer method consists in estimating the theoretical value of assets (land or buildings at the end of their useful life), while considering the likely return on investment of a real estate construction operation (and resale), optimizing the urbanistic potential of the land.
This method integrates the set of expense flows (purchase of the land, study, demolition, eviction indemnities, bank interest, construction, sales promotion, taxes and various duties etc.), linked to the potential income flows (price of the sale of the buildings).
The real estate developer method consists, begins by undertaking an urban survey, to establish the optimal developed surface that can be built on the land and to establish the market value of apartments (or other), feasible on aforesaid land.
The cost of the land (or of the buildings purchased for demolition) is then established as a percentage, in relation to the theoretical net income of the potentially feasible operation.
One calls "charge foncières" the cost that the real estate developers pay for the acquisition of the land rights.
THE DISCOUNTED CASH FLOW METHOD (DCF)
The method of future cash flows, also known as Discounted Cash Flow (DCF), is used very extensively in valuing assets and considers that an asset "is worth what it brings in returns" financially.
This method consists in calculating, by actualization, the net present value of the future cash flows of expected either through the sale or rental of the asset, notably for real estate or for an activity.
In the case of a transaction, the amount so determined corresponds to the price that a purchaser should accept to pay for a given investment, since this amount will allow him to cover the capital cost of funds (debt and own funds) that it would require.
One of the main appeals of this method is to shed light on the underlying hypotheses used for valorization (growth, profitability, investment,) and this, over a long period: the cash flows are modelised and forecast for the long term.
For a building (or real estate), the long term corresponds to the life cycle (between two phases of major repair and of renovation).
One can split the valuation by the DCF method into four phases that, without being completely independent, correspond to the most important elements of the model. These phases are the following :
- model cash flows ;
- estimate the normative flows ;
- calculate the average cost of capital ;
- determine the value of the asset under consideration.
PARTICULAR CASE: THE ASSESSMENT OF BUILDINGS, ATYPICAL, UNIQUE, POLLUTED OR DAMAGED
The expert is often confronted by the difficulty of having to estimate the value of atypical or unique buildings, which means that one or several of the above methods are inapplicable.
The case that comes to mind most often for the expert, is for buildings for which it is difficult to give a market value, ie. the case of buildings used out the context of a real market economy, such as schools, hospitals, retirement homes.
These buildings are often situated in zones where no other activity seems to be able to be implanted, given the particular layout and specificity of the existing volumes .
In the case of merger or acquisition between private clinics, for example, the expert is confronted with similar difficulties. In this case, however, the recourse to the DCF method offers a better view.
The most difficult case is that of obsolete or unique facilities such as sewage works or closed (even polluted) factories. In this case, the theoretical value is estimated, according to an expert's view, mainly based on the patrimonial value.
This can lead sometimes, to negative values, if one considers the costs of demolition, securing the property, depollution etc. |
