This article is a part of the Real Estate 101 series by Homebase, a leading PropTech company that provides a more flexible alternative to mortgages for foreigners in Vietnam, and is co-created with their team.
In recent years, the Vietnamese real estate market has grown rapidly and attracted foreign investment. Transactions are in the millions of dollars per unit, making Vietnam an appealing place to live and invest.
As a potential property buyer, it’s important that you can recognize a good deal when you see one. An important question to ask, though: What are the most useful property valuation methods in the market?
As you browse property listings, you’ll encounter many shapes and sizes with potentially varied prices. By using the methods we recommend in this article, you can better estimate the value of these assets and have a higher chance for a good deal.
Today, we review what real estate evaluation is and explain seven core methods when evaluating properties.
What is real estate valuation?
In short, real estate valuation is the gathering, analysis, and assessment of information and data to evaluate the worth of real estate.
Let’s define real estate as land and other landed property. The value of a real estate can be turned into monetary worth.
This monetary worth can be used for a variety of purposes, such as purchasing, selling, transferring, auctioning, donating, inheriting, investing, contributing money, and so on.
Real estate is one of the most complex asset types since it is influenced by many factors. Calculating the accurate property value is therefore a challenging and time-consuming task.
Real estate valuation is necessary because it directly impacts the whole real estate market in general, as well as each individual real estate transaction.
7 core principles of real estate valuations
Many principles are used in evaluating the price of a house. Below are seven core principles that you should always use throughout the valuation process.
1. Highest and best use: Properties have the highest and best use if they are legally usable and can yield the highest income.
2. Substitution: The price of a property is sometimes determined by the sale price of a comparable property.
3. Supply and demand: As with most things, the value of a property is influenced by supply and demand for the same types. When demand exceeds supply, the market price of that property rises, and vice versa.
4. Changeable value: The value of a property changes continually because it is influenced by natural, economic, legal, social, and environmental factors.
5. Anticipation: Predicting future profitability can help determine the worth of an item.
6. Conformity: When real estate is used in a way that is relevant to the economic and social conditions of a certain place, its value increases.
7. Competition: When there is a ready supply of land or real estate on the market, it, like other products, faces competition.
Common property valuation methods
With the fundamental ideas in mind, here are three ways to evaluate real estate’s worth.
1. Directed comparison method
This is the most popular and easiest approach to valuing a property. When you need to know a certain price for a property, you can look up comparable properties based on location, size, usage, rental price, and so on.
Example: You want to estimate the value of home A. House A is a three-story building with a total size of 70m2 in Ho Chi Minh City’s Go Vap neighborhood. Using the comparative approach, you explore the Internet, newspapers, and local brokers for a comparable house and come across House B.
B is a 72m2 four-story building located in the alley next to House A. House B is worth 5 billion VND. Based on this, you may predict that the selling price will be between 4.8 and 5.2 billion VND (depending on some other secondary factors such as design, construction, feng shui, etc.).
2. Potential income method
This method is a way of valuing real estate using the total cost of building the property.
Example: Consider a two-bedroom apartment that may be rented for VND 20 million per month. This apartment’s annual rental earnings will be 240 million VND.
The average annual income rate for rental flats is 3.5 – 4%. As a result, the market value of this flat will be between 240/4 percent and 240/3.5 percent, or between 6 and 6.8 billion VND.
3. Costing method
This approach of valuing real estate is based on the overall cost of construction.
Example: Consider the case of House A in Bien Hoa, Dong Nai Province. House A was built in 2015 and has a total space of 150 square meters on a plot of 220 square meters.
There are no matching properties in this neighborhood. We may use the following cost approach to estimate the price: Value of House A = Total value of the land (220m2) + Construction cost of the entire house.
The average land price in Bien Hoa city center at the time of appraisal was 20 million/m2, resulting in a total land value of 4 billion 400 million VND.
The home is 150m2 with one storey and a construction unit price of 5 million per sqm, for a total construction value of 750 million.
Assume we’re figuring out the cost in 2021, the depreciation due to temporary wear and tear is 20% after six years, thus the construction value in 2021 is 750 million x (100% – 20%) = 600 million.
As a result, the house’s overall worth, including land and building, is 5 billion.
Factors that affect the value of property
The approaches described above are fundamental and relative valuation methods. Other variables might have an impact on the market value of real estate.
Let’s look at five physical factors that influence the value.
Location of the property
This is the most essential physical feature in determining the value of real estate. The position of each property is unique; no two homes will have the same location.
It is not unexpected that many investors want property in city centers or economic districts with infrastructure development, transportation flow, public works, and residential neighborhoods.
As a result, a property on a main street near the city center might cost dozens of times as much as a house of the same size in a little alley a few kilometers away.
Always consider the location of real estate when calculating its value.
Appearance is important for many sorts of things, including real estate. A newly built and painted square-shaped house might cost 20-40% more than an old, decaying house.
Personal taste and aesthetic quality come into play here; the architecture, exterior, and interior design of the home all have an impact on its worth.
Size and shape
The land’s size and shape are greatest when they are optimal for the intended use and satisfy the buyer’s individual demands.
Square pieces of property with a large frontage are often worth a lot of money.
Nature and environment
The property itself, as well as the surrounding environment, will have an impact on the selling price.
This is the point at which you examine how the weather and climate will affect your property. Consider the land elevation, the area’s sea level, if it’s in a flood or drought zone, and whether the soil is suited for high-rise buildings.
The surrounding living environment is also important; if the house is in a filthy, loud area, the price of the property may drop.
Because real estate is a complex commodity, there are several approaches to determining the value of real estate.
Apartments and townhouses in residential neighborhoods will be more expensive if they are near schools, hospitals, and supermarkets. Office space, for example, will be more expensive if it is adjacent to the administrative center or a functional area.
To reduce noise and pollution, industrial real estate, such as factories, is often best positioned far away from residential neighborhoods. Homebase offers distinct rules for assessing properties based on their category.
Liquidity and net income of the property
All real estate investors are concerned with the profitability of their properties.
As a result, the potential of a real estate product to create income, as well as the total yearly revenue or profit from the property, has a substantial influence on the selling price of that property.
Below are two important factors to consider.
Refers to whether a property can be sold quickly and without price modification on the market. When the property may be easily sold if wanted, it has high liquidity.
A property with street frontage in District 3, HCMC, for example, may be sold rapidly; a buyer is likely to be found within one month.
The amount produced by the property after subtracting all associated costs. For example, suppose your rental unit generates 20 million VND per month, while your utility bill and income tax amount to 3 million VND per month. So the net revenue from your property is (20-3) x 12 months = 204 million VND each year.
The more liquidity and prospective net income a property has, the better. These, however, will fluctuate based on the market’s current situation.
Consider the health of the market
It’s worth addressing supply and demand again. When appraising a property, it is critical to understand how the market demand for that property is evolving.
For example, if a property is located in a heavily populated location, the supply for comparable properties will most likely be low. The price will rise due to increased demand from the surrounding region.
The value of a property can also be influenced by macroeconomic issues. Take into account the pace of economic growth, the unemployment rate, population growth, bank interest rates, and so on.
Real estate prices are affected by the market’s health on a cyclical basis. A real estate market cycle typically lasts 7 to 10 years and consists of five stages: Phenomenon – Growth – Recession – Freeze – Recovery.
Take into account the bigger picture of the whole economy. This will help you make more accurate predictions about a property’s value.
Legal and planning issues
Every real estate buyer or seller is concerned about the security of their transaction. The legal status of the property determines whether or not purchasing or selling a property is risky.
The documents listed below are essential:
- Certificate of land use right, ownership of a house (pink book)
- Permit for construction and completion certificate
- Sales and Purchase Agreement
Properties that are lacking these documents or have legal problems will be worth substantially less. Wrose, they can be subject to future evictions, penalties, and disputes.
The government’s development plans for the neighborhood play an important role, too. The majority of real estate price hikes in Vietnam are attributed to the government’s new planning for the area.
When there is knowledge about the area’s development, the price of real estate will rise. You should look for:
Infrastructure development: Infrastructure can improve the area’s connectedness. A freshly built highway or metro station, for example, might immediately increase in property prices in the surrounding neighborhood. The area is predicted to have significant economic growth potential in the future.
Public development: Building an extra hospital, a school, and an entertainment complex, for example, will boost the value of the surrounding real estate.
Real estate legislation and government directives: The real estate value changes as a result of policies governing investment, home acquisition, taxation, and economic development in each of these areas.
Real estate appraisal is a task that needs a significant amount of expertise, time, and effort. To properly analyze property and optimize your selling earnings, you must first get an understanding of the real estate market, applicable rules and regulations, and pricing strategies.
Investing in, purchasing, and owning real estate in Vietnam may be a difficult process, but Homebase is here to help.
Homebase provides an alternative to traditional bank mortgages that offer more flexible options to help both foreigners and Vietnamese nationals own property in Southeast Asia.
The company is backed by leading global multi-billion dollar investors and supports you in every single step of the process, from valuation, doing property diligence, purchasing, and more.
For more information, you can contact Homebase at +84 94 823 00 33 or visit homebase.com.vn.