Real Estate Valuation

Basic principles
José Babiloni Gomis
Maria Jose Rua Aguilar
Susana Babiloni Chust
 GENERAL INDEX

INTRODUCTION Page 13

CHAPTER 0.- GLOSSARY Page 15

CHAPTER 1.- VALUATION AND FINANCIAL CONCEPTS Page 21

1. Introduction
2. Value
3. Assets subject to valuation
4. Technicians authorized to evaluate
5. Value of the land
6. Value of constructions
7. Valuation Principles
8. Valuation methods
9. Surfaces. Measurement criteria
10. Importance of market study in the
determination of the value
11. Financial Laws
12. Interest rates
13. Net Present Value – Internal Rate of Return

INDEX9
 CHAPTER 2.- COST METHOD Page 43

1. Introduction
2. Concept
3. Cost components
3.1. Construction cost
3.2. Necessary expenses
3.3. Depreciation
3.4. Value of the land
4. Obtaining the Replacement Value
5. Applications

CHAPTER 3.- COMPARISON METHOD Page 63

1. Introduction
2. Concept
3. Metodología
3.1. Conducting Market Research
3.2. Selection of the obtained information
3.3. Comparison with the asset to be valued: homogenization
3.4. Adoption of value
4. Particular case of commercial premises - Method of
fund coefficient table
5. Applications
6. Example

CHAPTER 4.- RENT ADJUSTMENT METHOD Page 85

Introduction
2. Concept
3. Methodology
4. Components of the method

10 REAL ESTATE VALUATION. basic principles

 4.1. Cash flow
4.2. Economic Life
4.3. Type of update
4.4. Reversion value
5. Applications
6. Example

CHAPTER 5.- RESIDUAL METHOD Page 99

1. Introduction
2. Concept
2.1. Generalities
2.2. Impact value - Unit value
3. Methodology
3.1. Methods
3.2. Static Residual Method
3.3. Dynamic Residual Method
4. Applications
5. Examples

CHAPTER 6.- REPORTS IN THE PRACTICE OF VALUATION Page 119

1. Introduction
2. Structure of a report
3. Steps in the preparation of a report
4. Conditions and warnings
5. Requirements
6. Script

CHAPTER 7.- BIBLIOGRAPHY Page 151

INDEX11
12 REAL ESTATE VALUATION. basic principles
 INTRODUCTION

This book, which is born from the will of the College of Agents of the
Real Estate of Castellón to provide training to
its members in the field of appraisals, seeks to provide a vision
basic of what real estate appraisal is used for.
We also address the often complicated topic of reports.
of valuation, for it is of no use to carry out an excellent appraisal if
we are unable to communicate it correctly to society.
For all this, we structured the work into three parts. The first,
corresponding to chapters 0 and 1, deals with the glossary of terms that
we will use, as well as the basic concepts that we will need
for the realization of the different types of valuations that
we must carry out. In the second one, which covers chapters 2 to 5,
we address the different valuation methods that we will use to
the different purposes that we may encounter in the world of
the evaluations. Finally, in the third part, we will analyze what it is and
how a valuation report is structured. To this end, at the end of the
chapter we include a script where we indicate what the
checks to be carried out, the documents to be obtained, as well as the
structure that must be followed in a property valuation report.
Finally, in chapter 7 we provide a bibliography for those who
I want to deepen my understanding of the topics discussed in this book.

Likewise, we want to thank the College of Property Agents.

Real estate agency from Castellón, who has allowed us to collaborate with them.
in the recycling work and training of its members, urging him to
that he continues with that work towards his community.

INTRODUCTION13
 We hope this text will be helpful to all those professionals.
real estate agents looking to obtain market value, or those whose
purpose is required, especially at such a critical and complicated moment
like the current one.

For all of them, our recognition and best wishes.

The authors.

14 REAL ESTATE VALUATION. basic principles

 Chapter 0
GLOSSARY

Update: Get the current equivalent values of some

future values based on a discount rate (also called
discount).

Warning: Observation that is incorporated into the appraisal report

mortgage when there are doubts about any data or it has not been able to
fulfill the requirements established in the ECO 805/2003 order

Amortization: Quantification of the loss of value due to deterioration of the

property.

Antiquity: Age considered of the property.

Fees: Remuneration of notaries and registrars according to law.

Good: Anything that is, or can be, the object of appropriation.

Real estate: Item that cannot be transported, or if it is transported, it

produce a detriment to the real estate.

Good furniture: those susceptible to appropriation not included in the

previous description, and in general all those that can be transported
from one point to another without detriment to the property to which they are
united.

Capitalization: Obtain the equivalent future values of some values

current based on a capitalization rate.

GLOSSARY15
 Cadastral: Administrative register in which assets are described
rustic, urban, and special feature properties according
with what is defined in R.D 1/2004 of March 5 which approves the
consolidated text of the Real Estate Cadastre Law.

Certificate: Document attached to the appraisal report that certifies the

truth of it.

Comparable: Real estate of which its characteristics are known and its
purchase value, adopted to compare it with our asset to
assess by obtaining the value of the model asset using that method.

Administrative concession: Assignment of the Administration in favor of a

particular, on behalf of your action. It can be either goods or
services.

Condition: Observation that is included in the appraisal report

mortgage when the value obtained depends on compliance with the
cited condition.

Depreciation: Decrease in the value of an asset caused by its

physical, functional or economic aspect. Its economic quantification is the
amortization.

Real right: Private law that allows for the attribution of an immediate power
and real about one thing in front of anyone.

Differential: Increase of the rate over the risk-free rate that compensates the
higher risk, lower liquidity and security in an investment.

Buildability: relationship between the m2real or potential, that can be

build on an urban plot and its land area. Normally
is expressed in m2to/m2s.

Building: Any type of construction, solid, durable and suitable for

to host one or more spaces for the development of any activity.

16 PROPERTY VALUATION. basic principles

Financing: Financial resource that the company obtains to be able to
meet the proposed objective.

Cash flow: Inflows and outflows of money per unit of

time (usually 1 month).

Promoter expenses: Both administrative and financial expenses,

commercial and other types that the promoter must bear by virtue of
its activity.

Homogenization: Procedure by which the

characteristics of the appraised property in relation to other comparables,
to deduce its value by comparing its similarities and differences.

IBI: Property Tax. An annual tax levied on the

real estate based on its cadastral value whose exaction
it corresponds to the City Council of the municipality where the asset is located.

ICE: Tax on Special Contributions. Municipal tax that

records different works or services necessary for the common good of the
community.

ISIVTNU: Tax on the increase in value of land

urban nature. Also called Surplus Value. It is a tax that
records the increase in value of the land that occurs between the
current and previous selling and buying.

Interest: Price of the financial operation. Compensation of the lender

for the cession of a capital assuming a risk and loss of
availability of the same.

Liquidity: Possibility of converting an asset into cash without loss of value.

value.

Market: Homogeneous urban or rural environment where it is found

property and there is supply and demand for similar goods
characteristics of the model to be valued.

GLOSSARY17
 PEC (CEC): Execution Budget by Contract.

PEM (CEM): Execution Budget Material.

Fiscal polygon: Territorial division in the cadastral presentations that

they express the zone value of the characteristic use of the polygon. They
obtained based on their urban coherence, circumstances
administrative, market or socio-economic.

Credit Policy (Credit): Private contract with the intervention of a

merchant corridor through which the lender makes available to the
credited an amount of money for a year, being able to
to have the funds at their convenience, returning the capital to the
maturity, and paying interest based on the capital provided.

Loan Policy (Loan): Private contract with intervention of

a trade corridor through which the lender delivers to the borrower
a sum of money, returning the capital through amortizations
partial or total, and paying the interest based on the capital
pending amortization.

Price: A certain amount of money that a buyer is willing to

pay and the seller collect

Risk premium: The interest rate that assesses the risk of the operation

Profitability: It is the relationship between the investment and the benefits obtained.
per unit of time (usually 1 year).

Property registry: Legal registration in which the...

real estate and the rights that fall upon them.

Land classified as urban by urban planning regulations and that

meets the requirements set out in it to build. Normally
is expressed in m2

18 REAL ESTATE VALUATION. Basic principles

Urban land: Land classified as such by urban planning regulations.
subject to the Urban Real Estate Tax
effects of the cadastral valuation.

Discount rate: Interest rate used to calculate the value

actual of future capitals. In the updating method, it is the rate
risk-free + the risk premium. In the feasibility analysis
The cost of capital plus the risk premium to be assumed.

Risk-free rate: It is the interest rate in transactions without any type

of risk. Normally, the interest rate given by the debt is considered.
of the state.

Appraiser: Competent professional qualified to make appraisals.

Interest rate: The necessary rate for the remuneration of capital.

IRR: Internal Rate of Return. That rate which makes the NPV equal to zero.
obtaining the real profitability of an operation.

Value: Quantitative expression of the functional qualities of a good

which is generally the consequence of their situation in the market.

Current value: It is the current value equivalent of some future capitals to

a determined discount rate.

Legal maximum value: Maximum selling value of a property subject to

some protection regime.

Replacement value: Cost value of the building in the

supposed to carry it out with the same construction typology, as of
today, with current techniques and materials, with the same quality and utility
physical and functional. It can be Gross, without considering depreciations or net
considering them.

Value impact: It is the impact of the land value per meter.2of

building. It is expressed in €/m2c

GLOSSARY19
 Unit value: It is the value of the land per square meter.2of solar. It is expressed in
€/m2s

NPV: Net present value. It is the current value of all cash flows.
futures at a certain discount rate.

Economic life: time during which the property is attractive as

investment. It depends on the market, the property, and the type of business.

Effective life: The one that the appraiser considers based on its age,
utility, state of conservation and maintenance.

Useful life: The period in which the asset maintains the conditions for
to be used for the intended purpose.

20 REAL ESTATE VALUATION. Basic principles

 Chapter 1
VALUATION AND FINANCIAL CONCEPTS

1. INTRODUCTION

The origin of Valuation predates the existence of the concepts.

Market and Price. It can be placed around the year 3000 B.C. in ancient
Egypt, where a forecast of the expected harvests was made,
function of the flow level of the Nile. For this, they had the
"nilometers". This was the amount that each farmer had to pay to the pharaoh.
in terms of taxes.

Since the Egyptian nilometers, the taxative activity has suffered

important changes, until today, where the fundamental concept is the
Most probable market value. With the development of cities, it goes
gaining importance in Real Estate Valuation.

2. VALUE

The value of a good could be defined as the quantitative expression of

its functional qualities, and it is generally the consequence of its
situation in the market.

VALUATION AND FINANCIAL CONCEPTS 21

 The value of an asset could be considered in terms of the power to demand.
other goods in exchange -exchange value-, or based on their
possible usefulness or profitability; -rental value- that is, they can
establish various types of value according to the intended purpose.
On the other hand, it is important to highlight the inconsistent nature of value.
of a good over time, due to extrinsic reasons to it. This, coupled
to the relativity of all valuation, since it is always the object of
personal appreciation, highlights the difficulty of establishing a
the unique value of an asset, which is why a value is generally accepted
half result of a competitive market economy, result of
the supply and demand.

At this point, it is appropriate to differentiate the concept of value from a

property and its price.

The price reflects the particular characteristics of the transaction, and it is the
amount of money that a buyer is willing to pay and a
seller to receive in the sale of a real estate product in the
circumstances under which the sale occurs.

On the contrary, the value reflects the general conditions of the market and
it is the most likely price at which the good will be sold in a market without
pressures.

Ultimately, the Valuation consists of the estimation of values in a

determined moment, according to certain hypotheses, with a view to
for specific purposes and through calculation processes based on
technical information.

22 REAL ESTATE VALUATION. basic principles

3. ASSETS SUBJECT TO VALUATION

The Civil Code perfectly defines what is considered as property.

Art. 333. All things that are or can be the object of

appropriation is considered as movable or immovable property.

Article 334. They are real estate:

The land, buildings, roads, and constructions of everything

genre adhered to the ground.
2. The trees and plants and the hanging fruits, while
they were united to the land or formed an integral part
of a property.
3. Everything that is permanently attached to a property,
so lucky that he cannot separate from him without
breakage of the material or deterioration of the object.
4. Statues, reliefs, paintings or other objects of use or
ornamentation, placed in buildings or inheritances by the
owner of the property in such a way as to reveal the purpose
to unite them permanently to the fund.
5. The machines, vessels, instruments or utensils intended
by the owner of the estate to the industry or exploitation
that takes place in a building or property, and that
directly meet the needs of the
exploitation itself.
6. Animal nurseries, pigeon lofts, beehives, ponds
of fish or similar farms, when the owner ...
I have placed or conserved them for the purpose of

VALUATION AND FINANCIAL CONCEPTS 23

 keep them united to the farm, and being a part of it
a permanent way.
7. The fertilizers intended for the cultivation of a estate, which
be in the lands where they are to be used.
8. The mines, quarries, and escoriales, while their material
remains united to the deposit, and the living waters or
stagnant.
9. The dams and constructions that, even if they are
floating, are intended by their object and conditions to
stay at a fixed point of a river, lake, or coast.
10. The administrative concessions for public works and the
easements and other real rights over property
real estate

Article 335. Movable property is considered to be those that are susceptible to

appropriations not covered in the previous chapter, and in general all

those that can be transported from one point to another without detriment to the
what property they were connected to.

Article 336. They are also considered movable property.

rents or pensions, whether lifelong or inherited, affecting a person
O family, as long as they do not encumber a real estate property with a real charge, the
alienated trades, contracts for public services and the certificates and
representative titles of mortgage loans

24 REAL ESTATE VALUATION. basic principles

4. AUTHORIZED TECHNICIANS FOR VALUATION

Authorized technicians to assess

The qualified technicians to carry out assessments are

Architects, qualified for the valuation of constructions and

buildings, land, and soil.

Technical Architects, Building Engineers or Engineers

Technicians, measurements, calculations, assessments, appraisals,
appraisals, studies, and reports on constructions,
buildings, land, and soils.

Civil Engineers, in hydraulic utilizations and others

goods of their specialty, and of land and urbanization works
in concurrence with the Architects.

Agronomists and Forestry Engineers, in facilities and

buildings related to agricultural and livestock industries
forestry, and of lands with yields assigned to them
industries, without the possibility of urbanization, that is, preserving the
rustic character.

Industrial Engineers, regarding buildings and

industrial facilities and their annexes.

Real Estate Agents

Appraisers, within the field of insurance

VALUATION AND FINANCIAL CONCEPTS 25

 5. LAND VALUE

The value of land will vary greatly depending on the context in which it is located.
let's move, let's meet on a ground susceptible to harboring
building or land where construction is not permitted due to its use
agricultural, forestry or having some degree of protection.

In an appraisal for expropriatory purposes, we will have to adhere to

the legislation in force at any given time, which in this case is the
relatively recent Royal Legislative Decree 2/2008 of June 20
by which the consolidated text of the Land Law is approved. In its
Article 12 establishes the Basic Situations of the Soil, differentiating
between

Rural land: The preserved transformation through

urbanization and the one that is in the process of planning
territorial and urban planning for its transition to urban land.
(Previously No Buildable y Urbanizable
respectively

Urbanized land: The one integrated legally and effectively into the network
of endowments and services specific to population centers.
(Previously "Urban").

If we move in the mortgage field, we also find ourselves

with the existence of two types of soil, according to Order ECO
805/03, of March 27, on property valuation standards
properties and of certain rights for specific purposes
financial

Level I It will include all the lands that do not belong to level II.

Level II Will include the lands classified as non-buildable in

those that are not allowed to be built for uses other than their
agricultural, forestry, livestock or linked to
an economic exploitation permitted by the regulations

26 REAL ESTATE VALUATION. basic principles

 in force.
Land classified as will also be included.
urbanizable areas that are not included in a scope of
development of urban planning or not being it,
the conditions for its development have been defined in it.

In the realm of non-expropriatory urban valuations, the

urban planning classifies land as urban, developable, and non-developable,
giving various types of soil to each of the classifications.

Generally, Urban and developable land will be the type of land that
do not occupy us in our assessments. Regardless of the
regardless of the modality we are in, we can say that there are two ways to express
the Value of Land:

Unit Value: It is the value of the land per square meter of the plot. (€ /m)2ground).

Value by Impact: It is the value of the land per buildable square meter.
(€/m2 construction o ceiling). In the concept of global value per m²
built is the part that corresponds to the ground. The relationship
between one and the other, it gives us the buildability.

The value of land, as a general rule, depends on what can be done.

in it. If we consider the same real estate product and the same value
In the market, we observe that the value difference of the different
the building capacity will give us the plots.

The relationship between the unit value and the repercussion value is always
the buildability, that is to say:

VU = VR x buildability (or utilization)

Unit value markets are those whose unit of sale of

ground is not the same as the ceiling, like the detached single-family home, the use
industrial, some commercial use cases, equipment, etc.

VALUATION AND FINANCIAL CONCEPTS 27

 On the contrary, the impact value markets are those that
use as a sales unit the roof m², as residential use
collective, commercial use, office use, etc.

Example: Let's suppose the following case:

We have a property of 800 square meters of land with a buildability

allowed of 0.50 m/s.

From the market study, we know that the unit value of land is
area is €200.00/m².

Therefore, the value of the plot will be:

800.00 m x 200.00€/m = 160,000.00€

If we want to obtain the impact value per m² constructed

we would perform the following operation:

160,000.00€/ (800 m)2s x 0.5 m2to/m2s) = 400€/m2t

6. VALUE OF CONSTRUCTIONS

We highlight the following definitions in this section:

Building: Any type of construction, solid, durable, and suitable for

to accommodate one or several spaces for the development of any activity.
These constructions are subject to valuation, both in state
finished, as in construction, rehabilitation, and even in project,
as we will see in later units.

28 REAL ESTATE VALUATION. Basic principles

Part of a Building: A dwelling within a multi-family building,
a garage space, a storage room, a commercial premises, etc., within a
building, can be valued independently.

Common Elements of a Building: Spaces that are not for use

private within a building, and which must be accounted for in the
surface computation.

External constructions: Constructions are also considered

fences, low walls, ditches, etc. Of great importance for obtaining
expropriatory compensations.

Use of the Building: According to the purpose for which it was built,
it can be used for residential, commercial, or industrial purposes. The same building
could accommodate various uses: for example, a commercial space in a building
of homes.

Replacement Value:

Gross Replacement Value (GRV): Sum of the

investments that would be necessary to build, on the date of
the valuation, another property with the same characteristics but
using current technology and construction materials.

Net or Current Replacement Value (NRV): Results from deducting

from the VRB the physical and functional depreciation of the property, in the
date of the assessment.

VALUATION AND FINANCIAL CONCEPTS 29

 7. VALUATION PRINCIPLES

The appraisals, especially those for mortgage purposes,

they must follow a series of valuation principles. Commonly
accepted, collected by the mortgage valuation regulations, are:

1. Principle of Highest and Best Use: "The value of a property that can be used...
to be dedicated to different uses or to be built with different
building intensities, it is the one that results from allocating it, within
the legal and physical possibilities, to the most likely use and
financially advisable, with the intensity that allows to obtain
the highest value, which does not have to be this use the maximum
building utilization.

2. Principle of Substitution: "The value of a property is equivalent to

of other substitute assets with similar characteristics.

3. Principle of Residual Value: "The value attributable to each of the

production factors of a property is the difference between the value
total of said asset and the values attributable to the rest of the
factors.

4. Principle of Anticipation: "The value of a property that is found

In economic exploitation, it is a function of income expectations.
that is expected to provide in the future.

5. Principle of Temporality: "The value of a property is variable to the...

length of time.

6. Principle of Purpose: "The purpose of the valuation conditions the

method and the valuation techniques to be followed.

30 REAL ESTATE VALUATION. basic principles

 7. Principle of Probability: "In the face of various scenarios or probabilities,
the most likely will be chosen.

8. Principle of Proportionality: 'Reports will be prepared with the

appropriate amplitude, according to the importance and use of the object of
valuation, as well as its uniqueness in the market.

[Link] of Prudence: "In the face of various scenarios or probabilities, one must...
will choose the one that results in the lowest value.

An appraisal report can have various values, especially when

calculate by different methods. It is advisable to choose the lowest one.
of the values obtained, because that value is feasible. And this is more
easy to understand if we talk about assets as mortgage collateral.
It would be the case of a subsidized housing; in that case, its value is usually calculated.
value as protected housing and it is common to provide its value in
disqualification case, that is to say its market value. And in general, the
the first will be lower than the second. The value of the appraisal will be the
younger than them.

10. Principle of Transparency: "The report must contain the

necessary and sufficient information, for its easy comprehension and
detail the hypotheses and documentation used.

VALUATION AND FINANCIAL CONCEPTS 31

 8. PRINCIPLES OF VALUATION

The use of one method or another depends both on the purpose with
that the assessment (mortgage, urbanistic, legal, etc.) is carried out, as ...
from the available starting information. The methodologies
there are many, but basically there are four that are the most commonly used:

Cost Method: It is based on obtaining the Value of

Replacement or Restocking.

Comparison Method: It will be used when there is a Market

wherever possible, compare with similar properties, known
its value.

One approach of this method could be the Beta method, since

it allows us, with few samples, to obtain the value of the property
comparing with the market and the characteristics of the
comparables.

Rent Update Method: It will be used when

let's know the performance obtained from a certain good,
for example in economic exploitation, where we have
information about the income and expenses derived from their activity, or
in the case of obtaining any income from the asset to be valued. This
we can use the method both in the aspect of
capitalization as in the one for updating. And in its version of
Capitalization of Income, we will use it to value properties at
expropriate whose land is in a rural land situation

Residual Method: We are generally going to use it in the case

to value land.

32 REAL ESTATE VALUATION. basic principles

With the development of computing, methods are developed that
allow working with a larger number of data. They are called
Econometric methods, among them we have regression analysis.

In any case, the use of one or the other will depend on the type of
real estate that we are appraising and from the information or hypothesis of
game we have available.

On the other hand, the type of valuation we are conducting will influence it.
some of them, there is a regulation that tells us which methods
we must adopt, in the case of appraisals for mortgage purposes
(Order ECO 805/2003) and the cadastral valuations (R.D.
In the remaining cases, it is the appraiser's job to decide what
method or methods are the appropriate ones in each case.

9. SURFACES. MEASUREMENT CRITERIA

The measurement criteria to be used will not differ significantly.

depending on what the measurement is being conducted for. In any case, at
Appraise real estate, and given that it will usually be used for a
unit value per unit of area, will always be necessary the
measurement by the appraiser. In this regard, we will call:

Verified Area: It is the area measured by the appraiser on the plan.

limited that will be carried out during the visit to the property subject to appraisal. This
surface will generally be used in the calculation of values
technicians. Many times the information that may be reliable will not be
contain the registration documentation. It is, for example, common to measure
more surface area in homes where balconies have been added or
galleries to the homes; other times the documentation gives us a
surface without specifying what type of surface it is; it can also

VALUATION AND FINANCIAL CONCEPTS 33

 give us the occupancy of the property, being the surface
much larger real built.

In accordance with the specific regulations for mortgage appraisals, there

define (Order ECO 805/03):

Useful Area: Area of the ground delimited by the defined perimeter

through the inner face or intrados of the external enclosures of a
building or element of a building. In the case of outdoor spaces of
private use, such as terraces, balconies, clotheslines, etc., always
that are equipped with covers, 50% of the surface will be calculated
(never when they are discovered).

The area occupied on the floor by will not be considered useful.

fixed interior enclosures, by vertical structural elements, and
through channels and ducts with a cross-section greater than 100 cm 2, not the
surface of the ground with a clear height of less than 1.5 m.

It would be that surface that we can consider as 'walkable'.

Built Surface: Includes the usable area, plus the enclosures

exteriors computed at 100% when it comes to facades and at 50%
in the case of party walls or shared with other elements of the same
building. Covered outdoor spaces will be counted as 50%
of its surface measured over its horizontal projection.

Built Surface with Common Areas: Includes the area

built to which the proportional part that corresponds to it is added,
according to their share of profits and burdens on the surface
of the common elements of the building.

34 REAL ESTATE VALUATION. basic principles

10. IMPORTANCE OF MARKET RESEARCH IN
DETERMINATION OF VALUE

In many cases or in most assessments with which we...

we will find in our professional life, the value that we obtain
it will be based on the Market Value, which we will determine
based on the local real estate market.

In practice, we should give a single value when issuing a report on

valuation, which should correspond to the most probable value within
from the market. Perhaps it would be more correct to give a probable range of
values, to somehow avoid the possible inherent subjectivity
to any valuation, but in practice, an average value is accepted
result of a competitive market economy, result of the
supply and demand.

The goodness of our evaluation will depend on the rigor with which
Let's conduct the market study of the area of action that concerns us.
Therefore, we highlight the following definitions (Order ECO 805/03):

Market Value (MV): Price at which a property could be sold,

through a private contract between a voluntary seller and a
independent buyer on the date of the appraisal in the event of
that the good has been publicly offered on the market, that the
market conditions allow to make it available in a way
organized and that a normal deadline is established, according to the nature
of the property, to negotiate the sale. Does not include taxes or expenses of
marketing.

Local Market: The real estate of the homogeneous urban or rural environment
where the appraised property is located, or market sector when not
the above information is available.

For example, a population would not have a similar real estate market.
of 800,000 inhabitants and another of 300. Nor a coastal municipality and
one of interior.

VALUATION AND FINANCIAL CONCEPTS 35

 Comparables: Properties that are considered similar to the property
adequate or suitable for applying homogenization, according to factors
such as situation, conservation status, etc. It is what
traditionally been called 'witnesses'. The comparables must
belong to the same use, construction typology, environment, and obtained in
recent dates. The selection process will be discussed in the topic of
Comparison Method.

Speculative Elements: Data, offers, or scenarios that are still

relevant for determining the market value bring cause,
well of a behavior linked to the intention of an operator of
to benefit in the short term from price fluctuations in the
real estate assets, with the expectation of a change of use or
buildability, good of other extraordinary factors whose presence
the future is not guaranteed.

It is important not to take these elements into account in the determination

of the value, because we will generally be interested in ensuring the value of the asset
in a reasonable period of time, that is, we must ensure the
sustainability of value.

11. FINANCIAL LAWS

A financial law allows us to obtain equivalent capitals over time.

of time by virtue of a mathematical function.

Basically we have four:

Simple Capitalization Law.

Obtain the equivalent value in a future time from
actual capital.

36 REAL ESTATE VALUATION. basic principles

 In this case, the interest is not added to the initial capital.

Its formulation is:

I = C0* i * n
C1= C0+ C0* i = C0(1+i)
C2= C1+ C0* i = C0(1+i) + C0*i = C0((1+i + i) = C0(1+2i)
C3= C2+ C0* i = C0(1+2i) + C0*i = C0(1 + 2i + i) = C0(1+3i)
…
Cn= C0(1+ni)
His scheme would be according to the attached drawing.

C3

C0 x i
C0 Cn C2

C0 x i
C1 C0 + (3 C0 x i) =
C0 (1+3i)
C0 x i
C0

0 1 2 3 time

Law of Compound Capitalization

It also obtains the value of an equivalent capital in a
future time based on a current capital, but in this case
The interest is added to the initial capital.

VALUATION AND FINANCIAL CONCEPTS 37

 Its formulation is:

C1= C0+ C0* i = C0(1+i)

C2= C1+ C1* i = C1(1+i) = C0(1+i)*(1+i) = C0(1+i)2
C3 = C2 + C2 * i = C2 (1+i) = C0 (1+i)2*(1+i) = C0 (1+i)3

…
Cn= C0(1+i)n

Its scheme would be according to the attached drawing.

C3
C2 x i
C0 Cn C2

C1 x i
C1
C0 *(1+i)3
C0 x i
C0

0 1 2 3 time

Law of Simple Discount or Updating

Obtain the value of a current equivalent capital from
from a certain future.

C0 Cn

38 PROPERTY VALUATION. basic principles

 There are two types of simple discount:
oComercial, whose formulation is: C0= Cn(1 - d * n)
The rational, which is the inverse of simple capitalization:

!=
1+ ∗

Law of Discount or Compound Valuation

It is the inverse of compound capitalization:
!
!=
(1+ )!

12. INTEREST RATES

The interest rate is the compensation for the lender for the provision of
a financial capital that will not be available for a certain period
assuming a risk of possible borrower insolvency.

The concepts of interest rates that we deal with are:

Nominal interest rate: These are the rates offered by the entities.
financial.

Its characteristics are:

Annual and simple interest
It does not collect commissions or operation expenses.
Long-term inflation is implied.

VALUATION AND FINANCIAL CONCEPTS 39

 Effective cash or effective interest: It is the equivalent of interest
annual for periods less than a year.

It is obtained by fulfilling the following equivalence:

!º !"#$%&%'
(1+ !"#$%&%) = 1+ !"#$!%&

!/!"#$%&%
!"#$%&% = (1+ !"#$!%&) −1

Real interest rate: It is the nominal interest minus the

inflation.

1+ !"#$!%&
1+ !"#$ =
1+

Being inflation

Equivalent annual rate: It is the interest rate that also includes

of the nominal interest, the commissions and financial expenses of the
operation, as well as the duration of the operation.

The components of the interest rate are:

Risk-free rate: It corresponds to the interest rate without

no type of risk, normally the obligations of the state
and without inflation.

Inflation rate: The expected inflation over the life of the

financial operation
Risk premium: It is the interest that assesses the risk of the
operation.

40 REAL ESTATE VALUATION. basic principles

13. NET PRESENT VALUE – INTERNAL RATE OF RETURN

Net present value (NPV)

The Net Present Value is the sum of the cash flows discounted to
an interest rate.

It is an investment analysis method.

The formulation is:

!

=− +
(1+ )!
!!!

Initial disbursement
r = rate of return
i = periods

Internal Rate of Return (IRR)

The IRR is the discount rate that makes the Net Present Value equal to
0.

It is also an investment analysis method.

The formulation is:

!

0= − +
(1+ )!
!!!

Being,
Initial disbursement
r = discount rate
i = periods

VALUATION AND FINANCIAL CONCEPTS 41