Have you ever been in a situation where a real estate appraiser tells you that the value of your property differs from the price the seller is asking for it? Don’t rush to judgment, the Saudi real estate market varies greatly, and there is often confusion between the market value, cost, and price of a property. In this article, we will explain the difference and the most important factors that affect each of them. 

How do I know the market value of a property?

The market value of a property is defined as the opinion resulting from a valuation process that complies with international valuation standards. The market value is determined by a certified real estate appraiser, as it is based on many factors, the most important of which are:

• Location: one of the most important factors on which real estate valuation depends, as proximity to vital services such as schools, hospitals, commercial centres, and means of transport increases the attractiveness and market value of the property. The neighbourhood in which the property is located, its level of urban development, and its degree of safety and tranquillity also have an impact. 

• Property characteristics: These are everything related to the composition of the property itself, such as land area, built-up area, number of rooms, interior and exterior design, as well as the availability of facilities such as lifts, parking spaces, gardens, or security and energy systems. Properties with multiple uses or unique architectural features are often higher in value. 

• Property condition: This refers to the structural condition of the property. Is it new or in need of renovation? Is it ready for occupancy? Properties that are ready for occupancy and have been well maintained are valued higher than properties that are neglected, dilapidated, or not ready for occupancy. The quality of the finishes and materials used, as well as the updating of electrical and mechanical systems, are all taken into consideration.

• Market price: One of the most important factors considered by a property valuer is the price of similar properties in the same area at the same time. Therefore, any property valuer must continuously monitor and study the market to ensure the accuracy of the valuation. 

• Economic conditions: The general economy has an indirect but extremely important impact on property valuation. Recessions and recoveries, bank interest rates, inflation levels, and investment trends all affect buyers’ willingness and ability to purchase, and therefore the value of the property. Changes in tax regulations or government real estate policies may also raise or lower the valuation depending on their expected impact on the market.

These are the most important and prominent factors in real estate valuation. The appraiser relies on one or more real estate valuation methods during the valuation, which are:

• Market method: As mentioned, the market method relies primarily on studying similar properties in the same area and is one of the most commonly used methods, especially in residential property valuation.

• Cost method: This method calculates the cost of building the property, then calculates the rate of depreciation, and is used for properties that are not easily comparable, such as hospitals and schools.  

• Income method: This method is widely used in commercial real estate, where the income generated by the property during the year is calculated and discounted to its present value using an appropriate rate of return.

Based on all of the above, this is how the market value of a property is calculated, which is the value resulting from the valuation process based on real estate valuation standards.

What is meant by price?

When moving on to the price or cost of the property, we can define it as the actual price or amount paid, agreed upon by the seller and buyer when selling the property. It may be in line with the market value or may be lower or higher than it. It is based on many factors, including negotiation between the seller and buyer, in which case it may be in line with the value or may differ depending on the agreement between them. 

Other factors that also influence the price are necessity and psychological factors, such as the seller’s need to sell the property, which makes them agree to a price lower than the value, and the buyer’s need to purchase as quickly as possible, which makes them accept a price higher than the value, in addition to psychological factors that influence buying and selling. 

What is the cost of the property?

Finally, there is the cost, which is, in short, what is spent on the property or when building houses, whether it is the cost of purchasing the land, construction costs for materials and wages, licence and service fees, or any consulting or financing expenses. In other words, it is what the owner paid to bring the property to its current condition, but it does not necessarily reflect its market value. The cost may be higher than the value if excessive amounts were spent on finishing or construction, or lower if market conditions changed in favour of the owner. 

Finally, the market value of a property, its price, and its cost are terms that must be clearly distinguished to make informed investment decisions. At Aain, we help you determine the value of your property by international standards and by a team of certified real estate valuers. Contact us now and let the real estate valuation provide a complete view of the situation.