How does the real value method work for real estate (intrinsic value)?

The modular principle: This is how the expert calculates it.

The basic formula of the real value method for real estate

the real estate valuation method doesn't require a degree in rocket science, but detailed knowledge of construction costs is essential. The simplified formula is:

Land value + (New value of the building – depreciation due to age) + Outdoor facilities + Ancillary construction costs = Real value.

Each of these factors must be determined separately when using the real estate valuation method . Let's look at the components.

1. The land value : The foundation

In the real estate valuation method, everything starts with the land. Since land cannot be "produced," the comparative sales approach is usually used. What do similar, undeveloped plots of land in the neighborhood cost? This value is incorporated unchanged into the real estate valuation method because land (theoretically) does not depreciate or age.

2. The replacement value of the building: What will the reconstruction cost?

Here, the real value method for real estate demonstrates its technical nature. The appraiser calculates the volume of the house (in cubic meters according to SIA standard 416).

This volume is multiplied by a price per cubic meter.

• Example: A simple detached house might cost 750 CHF/m³. A luxury villa 1,200 CHF/m³.

The real value method for real estate is based on construction cost indicators (BKP). It simulates what it would cost to build the house new today.

3. Depreciation due to age: The ravages of time

This is the most critical point of the real estate valuation method . A house built in 1980 is not worth as much as a new build, even if it is the same size.

The real estate valuation method therefore deducts a percentage for each year. Two types of depreciation are distinguished:

• Technical deterioration: The material ages (roof tiles become porous).
• Economic devaluation: The style or floor plan is outdated (e.g., small windows, poor insulation).

A well-maintained house depreciates less than a neglected one when using the real estate valuation method . Renovations that preserve the property's value can partially reverse this depreciation in the real estate valuation calculation.

When is the real value method applied to real estate?

real estate valuation method is not suitable for every property . In practice, it is used in specific cases.

Special properties and luxury real estate

There are thousands of comparable properties for a standard terraced house. But what about a converted church, a castle, or an architect-designed house built with extremely expensive materials? Comparative methods fail in these cases. The real estate valuation method is often the only way to reflect the value of the materials used and the unique architecture. Since there is no "market price" for churches, the real estate valuation method provides the intrinsic value as a benchmark.

Homes without profit motive

Anyone building a house to live in themselves is often interested in the construction costs. The real estate valuation method reflects what the owner has invested. Banks often use the real estate valuation method as a supplement to check whether the purchase price is covered by the property's value ("Is the house worth the money, or am I just paying for air?").

Insurance purposes

Building insurance companies are very interested in the real estate valuation method . In the event of damage, they are responsible for paying for reconstruction (replacement value). The real estate valuation method provides precisely this basic data, but without the land value .

Advantages and disadvantages of the real value method for real estate

Like any method, the real value method also has its limitations when it comes to real estate .

Advantages:

• Tangibility: The real value method for real estate is based on physical facts (concrete, wood, land). It is less speculative than income approach valuations.
• Individuality: It recognizes expensive renovations. If you've installed marble instead of laminate flooring, the real estate valuation method directly rewards this through a higher price per cubic meter.

Disadvantages:

• Market disconnect: The biggest problem with the real estate valuation method is that it ignores supply and demand. You could build a villa out of gold in the desert. The real estate valuation method would calculate an astronomically high value (due to high construction costs). However, the market value would be zero because nobody would want to live there.
• Subjective depreciation: How much "less worth" is a 30-year-old bathroom? With the real value method for real estate, the assessment of age-related depreciation is at the appraiser's discretion, which can lead to fluctuations.

Real value vs. market value

A common misconception: The result of the real value method for real estate is not necessarily the selling price.

• During boom periods (Zurich, Geneva), the market price is often far above the result of the real value method for real estate , because buyers pay premiums for the location ("collector's value").
• In remote areas, the market price can be far below the result of the real estate valuation method . It would cost more to build the house than one would receive for it upon sale.

Therefore, professionals often combine the real value method with other methods (mixed value method) for real estate to better reflect reality.

Conclusion

The real estate valuation method is the "engineer's approach" to property appraisal. It answers the question of the cost of the building's structure. It is indispensable for special buildings where comparable properties are lacking and forms the technical backbone of many appraisals. Anyone who wants to understand how much "house" they are getting for their money must understand the real estate valuation method .

At the same time, you shouldn't rely on them blindly. A high valuation using the real estate valuation method doesn't guarantee a high selling price if the location isn't right. The real estate valuation method focuses on the physical structure, while the market focuses on attractiveness. The truth often lies somewhere in between.

If you want to know how the intrinsic value of your property compares to the current market value, it is recommended to use Loft 's analyses to get an initial, well-founded assessment.

Glossary

• Real value method for real estate: A valuation method that determines the value of a property from the sum of land value , building replacement value and outdoor facilities , less depreciation due to age.
• Intrinsic value: Synonym for real value; the material value of the physically existing building structure and the land.
• Depreciation due to age: The loss in value of a building due to technical wear and tear and economic obsolescence, a key deduction in the real value method for real estate .
• Cubic volume: The volume of the building (in m³) that is multiplied by a unit price to estimate the construction costs using the real value method for real estate .
• Market value: The price actually achievable on the market, which often differs from the result of the real value method for real estate (market value).