Real Estate Appraisals – Part I: Fundamentals and Importance
As part of the extensive range of personalized services offered in the Puerto Vallarta and Riviera Nayarit real estate markets, appraisals are essential for investors, buyers and sellers, as they establish an objective value of a property, which facilitates strategic decision-making. In this article, based on a conversation with industry expert Oscar Tovar, the Vallarta Real Estate Guide editorial team explored the fundamentals of appraisals, their importance, and the main factors that guide their completion.
Appraisals in the real estate sector are essential for investors as they contribute to determining the objective value of a property.
REAL ESTATE APPRAISALS
According to Oscar Tovar—a civil engineer, law graduate and master in valuation—an appraisal is a technical document that certifies the value of a property for a specific purpose. “An appraisal uses a specific methodology and is in accordance with the regulations established by expert authorities,” he says. This process is essential in various situations in the real estate market, from the purchase and sale of properties, to obtaining mortgage loans and tax planning.
The purpose of an appraisal is to provide a reference on the value of a property, allowing both buyers and sellers to have a solid basis for negotiating. Tovar explains that in Mexico the term “valuation” is used to refer to this activity, while the “appraisal” is the actual document itself, where the final value of the property and the technical basis for that valuation are detailed.
DIFFERENCE BETWEEN AN APPRAISAL AND AN ASSESSMENT
In some countries and in different use cases, the term “assessment” is used to refer to the process of valuing real estate, however, in Mexico the term “appraisal” is preferred. Both refer to the same thing: the process of determining the value of a real estate through a technical and regulatory analysis.
THE IMPORTANCE OF REAL ESTATE APPRAISALS
Real estate appraisals are essential for any transaction involving real estate. This document is also essential for notaries when formalizing legal transactions and procedures.
In fact, a reliable and well-founded appraisal not only protects the interests of the buyer and seller, but also helps financial institutions reduce risks by establishing the real value of a property, which will serve as collateral for a loan.
LEGAL AND TAX APPLICATIONS OF APPRAISALS
In Mexico, appraisals also play an important role in tax and legal processes. Tovar explains that, depending on the purpose of the appraisal, it can be used in transfer of ownership, in estate trials and as a basis for tax calculations. “The use of an appraisal depends on the purpose for which it was requested. An appraisal can be used to determine the commercial value of the property or for litigation processes, such as an inheritance or in a divorce proceeding”, says the engineer.
In addition, it must comply with a series of rules and regulations that guarantee its validity. Each document includes a section of pre-completion considerations which specify for which specific purposes the appraisal should be used, such as for commercial value orientation or for legal purposes.
Oscar Tovar.
KEY FACTORS IN COMPLETING A REAL ESTATE APPRAISAL
The preparation of an appraisal involves evaluating various factors that influence the value of a property. Tovar points out that among the most important elements are the location or the property, the characteristics of its construction and the topographical conditions of the land.
- Location of the Property
One of the main factors that determine the value of a property is its location. “The area where the property is located, as well as its position within the real estate site, play a crucial role in its value,” says Tovar. A property located on a corner lot, for example, will have a different value than one in the middle of the block, even if both are in the same neighborhood area.
In addition, there are properties with special characteristics, such as those with frontage on two or more streets, which can increase their value.
- Construction Characteristics
The type of construction, its age and the building conservation are also determining factors in the valuation of a property. “An older but well-preserved building can have a higher value than a new one that has been poorly maintained,” he explains. Other aspects, such as the materials used, the architectural design and the additional property amenities also influence the final value of the property.
- Topographic Configuration of the Terrain
The topography of the land is another factor that affects the value of a property. Tovar mentions that lots with ascending or descending slopes can vary significantly in value, depending on the characteristics of the area, and if those inclines or declines affect the views from the property. “In areas like Puerto Vallarta, properties with ocean views tend to have a higher value, even if they are on a land parcel with slopes that are difficult to develop or build on,” he says.
On the other hand, land with an adequate front-to-back ratio, or those at street level, may be valued higher due to their ease of development and construction.
- Land Use and Local Regulations
Land use is another key aspect that must be considered in an appraisal. Local regulations and restrictions imposed by urban development plans can limit or enhance the value of a property. “A property in an area intended for commercial or tourist use will have a different value than one intended for residential use, even if they are located in the same geographical area,” explains Tovar.
Local regulations can also affect the value of a property if there are limitations to its development, such as height restrictions, building density, or special zoning requirements.
Real estate appraisals are fundamental tools in the world of real estate, as they allow you to understand the real value of a property through a detailed analysis of various factors. The location, the characteristics of the construction, the configuration of the land and local regulations are some of the most relevant elements that will be taken into account during the valuation process.
In the second part of this article, we will delve into the current costs of appraisals in the real estate market in Puerto Vallarta and Riviera Nayarit, as well as other key factors that every investor or professional in the sector should know in order to make informed decisions.
