Costa Rica Real Estate Values – Errors in real estate appraisal methods

It’s well known that a person who asks for an appraisal wants a high price for selling, a low price for buying, an exaggerated price for getting bank credit, an insignificant price when it comes to taxes, or an exorbitant price if giving it as a donation in kind.

This means that subjectivity counts a lot when it comes to property appraisals. Nevertheless, experts say that when two appraisals are made, there should not be significant differences in the outcome.

The problem is that some do not know appraisal methodology or they apply it incorrectly.

Common cases. The usual methodology applied is called “Cost of Replacement,” which consists of estimating value based on what it would cost to replace or build a property with the same characteristics or conditions.

Nevertheless, other programs exist that give “multi-value” to the character of appraisals. The application of various approaches can generate different figures, according to the aim of the evaluation.

Often an appraiser bases the price on supply and demand and the appraiser can also be influenced by caprice on part of the seller.

For the expert, the best choice is to apply the market method on real sales, which consists in confirming information on real estate that has similar characteristics.

The choice of one or the other method depends on the purpose of the appraisal.

An important point to consider is market factor, which is defined as the market value divided into the Cost of Replacement of the property. This factor can be higher than the cost of replacement especially if the property is in an area of high demand, or below, if for example a very expensive house is built in a marginal area.

Out of date. Another factor that leads to differences in two appraisals is that people often consult amounts listed by city halls, where they classify types of buildings and assign them approximate values.

The problem is that many of these values are out of date and in addition were made for tax purposes.

Banks ought to be very clear in their role in influencing prices. Their appraisers could make prices go up or down.

Prices are constantly changing and financial entities should follow up on these variables to keep up to date.

For these reasons, it is common to see that there are areas where houses don’t sell and whose prices should come down because of oversupply, or conversely, expensive houses in trendy areas. If you accept a value assigned by a bank, this could become the average that is acceptable to the market.

Appraisal approaches

• Cost method. The value of the property depends on the cost of replacing with a similar property with similar characteristics and can be easily estimated with a budget. This applies principally to public buildings.
• Method of income. This method establishes that the value is equal to the amount of income the building generates or will generate during its life span. This is based on a detailed analysis of the income-producing capacity of a property.
• Market method: The value is based on the comparison of operations performed by properties similar to the one being appraised, showing qualitative differences that may exist between them.

Our thanks to Gustavo Sanchez and our friends at La Nación – Costa Rica’s largest Spanish circulation newspaper for their permission to include their weekly news reviews.

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Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.