Real Estate Appraisals – Part II: Relevance in Purchase and Sale Processes

By Jorge Chávez
Dec. 17, 2024

Real estate appraisals are essential for investors, buyers and sellers, as they allow for the establishment of an objective value of a property, allowing for strategic decision-making.

In this second and final part of this special feature article from the Vallarta Real Estate Guide editorial team, civil engineer Oscar Tovar, who also has a law degree and a master’s degree in Valuation, delves into other essential aspects this process, including the specific factors that affect valuations, their costs, as well as the particularities between states.

In addition, the relevance of an official appraisal in purchase and sale processes, in obtaining mortgage loans, and in legal disputes is analyzed. At the end of the article, a series of practical tips for real estate buyers and sellers will be shared.

FACTORS THAT AFFECT THE VALUATION OF A PROPERTY

Tovar mentions that an appraisal not only considers the physical characteristics of a property (such as surface area or construction), but also internal and external factors that can affect the real estate market. “Among the internal factors, changes in government, which can generate uncertainty and thus slow down investments, as well as economic crises, which usually cause an increase in the supply of properties due to those seeking to liquidate quickly, can effect valuations.”

On the other hand, external factors can include international events such as wars or pandemics, which can affect the global economy and, therefore, the real estate market.

The specific location within a building or condominium is also crucial. “A condo with the same characteristics and measurements, within the same complex, can have price variations of up to one million pesos or more. A unit with an ocean view or on a higher floor, compared to one without a view, for example, will have a significantly higher value,” he explains.

HOMOLOGATION AND COMPARABLES IN THE VALUATION PROCESS

To make an accurate appraisal, the homologation process is used, in which similar properties within the same area are compared. To do this, engineer Tovar explains that the factors of the property under study are adjusted with comparable properties so that they are in a similar range. “This process allows us to establish an objective and realistic value of the property, taking into account its location and specific characteristics,” he says.

Additionally, a “negotiation factor” is applied, which takes into account the reduction in the price that the owner usually gives when starting the sale process. “Generally, this percentage does not go beyond five percent,” he adds.

VALUATION DIFFERENCES BETWEEN STATES AND REGIONAL FACTORS 

Although the valuation methodology is uniform in Mexico, values may vary between states due to region-specific conditions. For example, in places with high rates of violence, investor interest is lower, affecting the value of real estate. In contrast, areas such as Puerto Vallarta and Bahía de Banderas are very attractive due to their security, infrastructure and tourist attractions, which raises the value of real estate.

Another factor that influences the value of a property is urban development in the area. “If a piece of land does not initially have access to infrastructure, its value is low; however, as urbanization expands and services are added, its value will increase significantly.”

PROPERTIES WITH SPECIAL VALUATION

There are properties, called atypical properties, whose valuation is complex due to their uniqueness. An example of them here in Puerto Vallarta is the International Convention Center. “The lack of direct comparables forces appraisers to employ specific methods and unique criteria.” Other examples are historic buildings deemed as Assets of the Nation, which require a detailed and particular analysis. 

THE COSTS OF VALUATION SERVICES AND WHO COVERS THEM

“Generally, the cost of an appraisal in Puerto Vallarta and Bahía de Banderas usually ranges between 2.5 to 3.5, which means that it is 2,500 to 3,500 pesos for every million pesos of the estimated value, not including VAT,” explains Tovar, who adds: “These costs vary depending on the type of property, the time required to make the valuation and the additional studies that may be required.”

On the other hand, our expert points out that, in the case of an appraisal that will be used for litigation, its cost may increase due to the need for the expert to attend hearings and defend his opinion before the judge and the parties involved. 

The cost of the appraisal is covered by the party requesting it, whether it is the buyer, the seller, or, in cases of legal disputes, one of the parties involved. “In judicial situations, the expert must remain impartial and acts as an assistant to the judge in the administration of justice, defending his assessment without favoring any of the parties,” he adds.

IMPORTANCE OF THE OFFICIAL APPRAISAL IN THE PURCHASE-SALE PROCESS

An official appraisal is essential at various stages of the real estate process. First, it allows buyers and sellers to know the real value of the property, facilitating a fair negotiation. It is also essential for obtaining mortgage loans, since financial institutions require a reliable appraisal to calculate the amount of the loan.

TIPS FOR BUYERS AND SELLERS

For buyers, engineer Tovar recommends always requesting an appraisal before starting the purchase process, as this provides an objective view of the value of the property. In this way, they can ensure that they will pay what is fair and, above all, that the property will meet their investment expectations.

For sellers, Tovar suggests maintaining an up-to-date and professional appraisal, especially in changing real estate markets. A realistic price backed by an appraisal, in addition to demonstrating seriousness and transparency, can help facilitate the sales process. 

Finally, both buyers and sellers must understand the importance of an appraisal in the context of possible economic, governmental, or social changes. A good appraisal is more than just a requirement; It is a tool for asset protection and informed decision-making.