What does the market value of a property mean?

The market value of a property in detail: methods and myths

to determine the market value of a property . Three main valuation methods have become established in Swiss practice. Which one is applied depends heavily on the type of property.

The Hedonic Method: The Computer Comparison

This is now standard practice for traditional single-family homes and condominiums. Banks love this method because it is fast and inexpensive.

• How it works: Software compares your property with thousands of property transfers that have taken place in your region in recent months.
• The logic: Each feature (balcony, year of construction, sea view) has a price. The system adds these features to determine the property's market value .
• Advantage: It reflects the current market very accurately.
• Disadvantage: It fails when dealing with collector's items. A castle or an extremely luxurious estate is hardly comparable. Here, the hedonic market value of real estate reaches its limits.

The real value method (substance value): stones and soil

Here, calculations are made to determine what it would cost to build the house exactly the same way again today.

• The land value : What does the property cost?
• The current value of the building: What does the new building cost minus depreciation due to age?

The sum of these values represents the intrinsic value. Often, a market premium is then added to this to arrive at the property's market value . This method is frequently used for custom-designed architect-built homes where comparable properties are lacking. In these cases, the property's market value is based solely on its intrinsic value.

The income approach: return before emotion

For apartment buildings or commercial properties, nobody cares how beautiful the facade is. Only the cash flow counts.

• The calculation: The annual rental income is capitalized.
• The focus: An investor asks: "What return will this property generate?" The market value of a property is directly linked to rental income. If interest rates rise, the income value often falls.

For you as a homeowner, this method is usually irrelevant, unless you have a granny flat.

The bank and the lower of cost or market principle

A common shock for buyers: You agree on a price of 1.2 million Swiss francs with the seller. However, the bank estimates the property's market value at only 1.0 million.

What happens? The bank only finances based on the lower value (lower of cost or market principle).

• The consequence: You have to contribute the difference of 200,000 francs as additional equity .
• The reason: The bank wants to ensure it gets its money back in the event of a forced sale. Its market value of the property is therefore conservative and cautious, while the selling price often includes hopeful expectations.

Factors influencing market value

What drives the market value of real estate up or down?

• Location, location, location: the most important criterion. A house in the center of Zurich has a significantly higher market value than the identical house in the Jura region. Micro-location (noise, sun exposure, proximity to schools) is crucial.
• Condition and investments: A new roof or a modern heating system (heat pump) increases the market value of a property . A backlog of necessary renovations (old windows, oil heating) significantly reduces it.
• Macroeconomics: Interest rates and the economy. When mortgage rates are low, demand rises, and with it, the market value of real estate . When interest rates rise, the market often corrects downwards.

The difference between the tax value and the insurance value

Don't be confused. There are different "values".

• Official value (tax value): Used for wealth tax purposes. In most cantons, it is significantly lower than the market value of the property (often only 60-70%).
• Insured value: This serves as building insurance. It covers reconstruction in case of fire, excluding land. It has little to do with the market value of the property on the open market, as it ignores the land price.

When do you absolutely need an expert opinion?

In some situations, an online valuation of a property's market value is not sufficient.

• Divorce: When assets need to be divided, parties often argue. A neutral expert appraisal of the property's market value can bring peace.
• Inheritance: In order to fairly distribute inheritance shares or calculate compulsory shares, the market value of the property must be precisely determined as of the relevant date (date of death).
• Sale: To determine the asking price. A price that is too high makes the item a dud ("burnt item"), a price that is too low means giving money away.

Conclusion

The question "What does the market value of a property mean?" leads to the realization that there is no single true value. The market value of a property is always an estimate of probability. It is the price that a willing buyer and a willing seller would agree on in a functioning market.

For you, this means: Don't rely on your gut feeling when making important life decisions. The market value of a property is a dynamic figure driven by interest rates, the building's condition, and market sentiment. Having the market value of your property professionally assessed protects your assets and allows you to negotiate on equal footing – whether with the bank, your ex-partner, or a buyer.

If you are unsure whether the value assessed by the bank is fair, or if you need an initial, data-based estimate of the property's market value , Loft offers precise market analyses and valuation tools to provide clarity.

Glossary

• Property market value: The estimated market value that can currently be achieved in a sale under normal conditions. It forms the basis for financing and sale.
• **Hedonic method: A comparative valuation method in which computer programs calculate the market value of a property** based on thousands of transaction data points . Standard practice for banks.
• **Lower of cost or market principle: The principle of banks to use either the purchase price or the estimated market value of the property as the basis** for financing – whichever is lower.
• Real value (intrinsic value): The value comprised of the land value and construction costs (less depreciation). It is a component used to determine the market value of specific properties.
• Income approach: A valuation method for income-generating properties based on rental income. It determines the market value of a property primarily from the investor's perspective.