Real Estate Appraisal in Germany by Stefanie Wielgosch

Real Estate Appraisal in Germany 

 
In Germany there are three major methods to evaluate a property. The Vergleichswertverfahren (sales comparison approach), the Ertragswertverfahren (income capitalization approach) and the Sachwertverfahren (cost approach). All three methods are standardized by law in the Immobilienwertermittlungsverordnung - ImmoWertV [http://immowertv.de/ ]).

These valuation methods are used to receive the Verkehrswert (market value) of properties. As per law (§ 194 BauGB) the market value is the price:

·         In a point of time on that the valuation refers to

·         In ordinary course of business

·         on the legal situation and actual characteristics, the other condition and the location of the land or any other subject of the valuation

·         Without consideration of abnormal or personal relationship

We have to estimate the market value for several reasons, for example for a court decisions, company take- over, successions, divorce and so forth.

For every method we can calculate the land value with the applicable value of the Kaufpreissammlung (purchase price collection/ the German digital property transaction inventory). We only have to multiply the adequate price from the purchase price collection with the area of the lot in square meters.

The sales comparison approach (§ 15 ImmoWertV) is the best method due to the fact that it leads to secure conclusions because you use some comparables which were recently sold to find the market value. You should take comparables, which enough similar features in regards to size, location and so forth.

You can use this approach especially for the evaluation of land but also for built-up lots. When the lot is built- up then you can only use the sales comparison approach if the houses are very similar, like single- family row houses, condominiums, simple detached houses and also garages.

 If there are differences between the subject and the comparables, then you have to adjust these differences to the subject.

Instead of comparables you can also use the purchase price collection/ the German digital property transaction inventory, which consists of the sales prices from all properties, which were sold, to estimate a market value of a property.

We use the income capitalization approach (§§ 17-20 ImmoWertV) to obtain the market value of leased real estate, office buildings, retail shops, hotels and garages. In general you can use it for all properties, which achieve huge revenues from their leasing.

The most important element of the income capitalization approach is the net income of the lot. This value is equal to the gross annual return from a property deducted from the operating costs. The gross annual return from a property consists of all revenues which you can receive by ordinary management. To the operating costs belong the risk of loss rental income, maintenance costs, administration costs and not apportionable operating costs.

From the net income of the lot we now subtract the land value multiplied by the property yield to get the net income of the building. This multiplied with the present value factor produces the present value of the building. The present value of the building plus the land value, which we deducted before minus deferred maintenance, shows the capitalized income power.

The present value factor and the property yield should gather the overall value ratios on the property market when this cannot be considered otherwise. The property yield is the interest rate with those market values of properties will bear interest at market rates. They are based on appropriate purchase prices and the corresponding net income for similarly constructed and used properties.

	German				English
	Jahresrohertrag (JRE)				Gross annual return from a property
-	Bewirtschaftungskosten			-	Operating costs
		Mietausfallwagnis			Risk of loss rental income
		Instandhaltungsk. (Whg.)			Maintenance costs apartment
		Instandhaltungsk. (Garage)			Maintenance costs garage
		Verwaltungskosten (Whg.)			Administration costs apartment
		Verwaltungskosten (Garage)			Administration costs garage
		nicht umlagefähige BK			Not apportion able operating costs
=	Jahresreinertrag des Grundstücks			=	Net income (lot)
-	Bodenwert x Liegenschaftszinssatz			-	Land value x property yield
=	Jahresreinertrag der baulichen Anlagen			=	Net income (buildings)
x	Barwertfaktor			x	Present value factor
=	Barwert der baulichen Anlagen			=	Present value (buildings)
+	Bodenwert			+	land value
-	Instandhaltungsstau				-Deferred maintenance
=	Ertragswert				Capitalized income power

The cost approach (§ 21-23 ImmoWertV) will be applied when the revenues of the property are less important than the value of the subject. Therefore the market value of Single- family houses und duplex houses will be estimated with this method.

 

In this method the value of the land and the costs of production are the two important components which add up to the real value/ market value. The costs of production consist of the costs of production of the building, the costs of exterior features, miscellaneous constructions and additional costs of production. From the costs of production we subtract the deduction of value on account of age and add the land value to receive the preliminary real value, that we have to adjust to the market (for example some characteristics of the location) and with some specifics of the subject to receive in the end the real value.

	German				English
	Herstellungskosten (HK) baul. Anlagen				Costs of production (cop) of buildings
+	HK baulicher Außenanlagen			+	Cop of exterior features
+	HK sonstiger Anlagen			+	Miscellaneous constructions
+	Herstellungsnebenkosten			+	Additional costs of production
=	Herstellungskosten			=	Costs of production
-	Alterswertminderung			-	Deduction of value (building)
					on account of age
+	Bodenwert			+	Land value
=	vorläufiger Sachwert			=	Preliminary real value
	vorläufiger Sachwert				Preliminary real value
+/-	Marktanpassung			+/-	Adjustment of market
=	Marktadjustierter vorläufiger Sachwert			=	Adjusted real value
+/-	objektspezifische Besonderheiten			+/-	Specifics of subject
= Sachwert				=	Real value

You can also apply both methods, the income capitalization approach and the cost approach to get a comparison of the capitalized income power and the real value. These two values should be nearly the same.

The three approaches are not the only approaches, which will be applied in Germany, but the most often used and the only ones that are regulated by law. The other approaches you only apply in some special cases.

References:

Mannek, Wilfried; Profi-Handbuch: Wertermittlung von Immobilien, Walhalla U. Praetoria; 4. Auflage

Metzger, Bernhard; Wertermittlung von Immobilien und Grundstuecken, Haufe Verlag; 3. Auflage

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