This article is co-developed with Homebase and belongs to their Real Estate 101 Series. Homebase offers more flexible solutions to homeownership across Southeast Asia. To learn more about Homebase, please visit http://homebase.com.vn/
Every day, tens of thousands, if not millions, of real estate transactions occur in Vietnam, with prices ranging from hundreds of millions to hundreds of billions of Vietnamese Dong (VND). What’s the best way to tell if you’re receiving a decent deal? How do you figure out how much to ask for your house?
The information in the following article will help you determine the value of any real estate product in Vietnam.
- 1 What are the elements of real estate?
- 2 Liquidity and net income
Real estate valuation: What is it?
Simply put, real estate valuation is the process of gathering, analyzing, and evaluating facts and information in order to determine the value of a property.
Real estate refers to land and other landed assets. The worth of real estate can be measured in dollars, which is a common currency in buying, selling, transferring, auctioning, donating, inheriting, investing, contributing capital, and so on.
Real estate is one of the most complicated asset types since it is influenced by a wide range of factors. As a result, calculating the proper real estate value is a real challenge.
Real estate valuation is crucial because it has a direct impact on the overall real estate market, as well as each individual real estate transaction. Learning about how to effectively evaluate assets will help you make better decisions in home buying.
Top 7 key principles for real estate valuation
When determining the value of a home, there are several things to remember. Below are 7 core concepts that you should follow at all times during the valuation process:
- Highest and best use: Properties are considered to have the highest and best use if they can be proven to be used legally and provide the highest income at the time of valuation.
- Substitution: The sale price of a similar property tends to affect the price of a property.
- Supply and demand: Like most things, the value of a property is influenced by supply and demand for that particular form of property. When demand for a certain type of property outstrips supply, the market price of that property rises, and vice versa.
- Value is subject to change: Natural, economic, legal, social, and environmental variables all influence the value of a property.
- Prediction: Estimating future profitability can help determine the worth of an item.
- Conformity: Real estate has more value when it is utilised in a way that is appropriate to the economic and social conditions of a certain place.
- Competition: When there is a ready supply of land or real estate, it, like other goods, faces competition.
3 more basic valuation methods
These are three ways for determining real estate value based on the fundamental concepts.
Direct comparison approach
This is the most popular and straightforward method of determining a property’s value. You can obtain information on similar homes based on location, size, use, rental price, and other factors when you require a precise pricing for a house.
For instance, let’s say you’re trying to figure out how much house A is worth. House A is a three-story building with a total area of 70m2 in the Go Vap neighborhood of Ho Chi Minh City. When utilizing the comparative approach, you look for a similar house on the internet, in newspapers, and through brokers in the region, and you find House B.
House B is 72m2 in size, has four stories, and is located across the alley from House A. House B is on the market for 5 billion VND. You might predict that the selling price will be between 4.8 and 5.2 billion VND based on this (depending on some other secondary factors such as design, construction, feng shui, etc.).
Potential income method
The property’s ability to generate money is the second approach of evaluating real estate. This strategy is widely employed in commercial real estate that may be rented out, such as apartments, downtown residences, and so on.
The average annual rental return of a property is tied to its relative worth.
Example: Consider a two-bedroom apartment that may be rented out for VND 20 million per month. This flat will generate 240 million VND in rental revenue over the course of a year. The average annual income rate for rental flats is between 3.5 and 4%. As a result, the market value of this apartment will range from 240/4 percent to 240/3.5 percent, or $6.8 billion VND to $7.8 billion VND.
This approach of valuing real estate is based on the overall cost of construction.
Example: Let’s take a look at House A in Bien Hoa, Dong Nai. House A was constructed in 2015 and has a total space of 150 square meters on a 220 square meter plot of land. There are no other houses like it in this neighborhood. We can use the following cost method to figure out the price:
Value of House A = the total value of the land (220m2) + the construction cost of the entire house.
House A’s value is equal to the overall value of the land (220m2) plus the full house’s construction cost.
What are the elements of real estate?
Basic and relative valuation approaches are described above. Other things can influence the real estate market value. Let’s look at five physical factors that influence the value:
- Location: The most essential physical component in determining the value of real estate is its location.
The position of each property is distinct; no two properties will have the same location. Many investors seek real estate near city centers or economic zones with infrastructure development, traffic flow, public works, and residential neighborhoods, which is understandable. As a result, a property on a main street near the city center can cost tens of thousands of dollars more than a house of comparable size in a back alley a few kilometers away. Always consider the location of the property when calculating its worth.
- Appearance: For many types of things, including real estate, appearance is crucial. A square-shaped house that has just been built and painted can cost 20-40% more than an old, decaying house. Personal taste and aesthetic quality play a role here, and the architecture, exterior, and interior design of the house have an impact on its worth.
- Size and shape: The land’s size and shape are best when they are appropriate for the planned purpose and fit the buyer’s unique requirements. The value of square pieces of land with a large frontage is often considerable.
- Nature and environment: The selling price is influenced by both the property and the surrounding environment. Here you’ll think about how the weather and environment will affect your home. Consider the land elevation, the area’s sea level, whether it’s in a flood or drought zone, and whether the soil is suitable for high-rise buildings, for example. The property’s surrounding living environment is also important; if the house is located in a polluted, noisy area, the price may drop.
- Property type: Because real estate is such a complicated commodity, we may look at its worth from a variety of angles. Residential apartments and townhouses will cost more if they are close to schools, hospitals, and supermarkets. If commercial real estate, such as offices, is close to the administrative center or a functional area, it will be more expensive.
Liquidity and net income
The profitability of one’s real estate is important to all investors. As a result, the real estate product’s potential to create income as well as the total annual revenue or profit generated by the property have a substantial impact on the property’s selling price.
The term “liquidity” relates to whether or not a property may be sold rapidly and without a price reduction on the open market. When a property can be easily sold if desired, it has high liquidity. A house with street frontage in HCMC’s District 3 can, for example, be sold rapidly; a buyer will most likely be found within a month.
After deducting all relevant costs, net income is the amount earned by the real estate. Let’s say your rental unit brings in 20 million VND per month, but your utility bill and income tax total 3 million VND each month. So your property’s annual net income is (20-3) x 12 months = 204 million VND.
The more liquidity and prospective net income a property has, the better. These, however, will fluctuate based on the present state of the market.
Take into account the market’s health
It’s worth addressing supply and demand once more. When appraising a property, it is critical to understand how the market demand for that property is evolving. If a house is located in a densely populated location, for example, the supply of similar properties will most certainly be limited. The price will rise due to increased demand from the surrounding area.
Macroeconomic issues might also have an impact on a property’s value. Consider economic growth, unemployment, population growth, bank interest rates, and other factors. Real estate prices are affected by the situation of the market on a cyclical basis. A real estate market cycle typically lasts 7 to 10 years and is divided into five stages: Growth – Phenomenon – Recession – Freeze – Recovery Growth – Phenomenon – Recession – Freeze – Recovery
Taking the big picture of the economy into account will help you value real estate more accurately.
Legal and planning issues you might encounter
Every real estate buyer or seller, Homebase can assure you, is concerned about the security of their transaction. The legal status of a property determines whether or not buying or selling it is risky. The following documents are extremely important:
- Ownership of a house and a certificate of land use right (pink book)
- Construction permit and completion certificate
- Agreement on Sale and Purchase
Properties that are lacking important documentation or have legal infractions will have a reduced value and may be vulnerable to evictions, penalties, and lawsuits in the future.
The government’s aspirations for the area cannot be overlooked when it comes to real estate pricing. The majority of real estate price hikes in Vietnam are due to the government’s release of fresh planning information in the area.
When there is knowledge on the area’s development planning, real estate prices will rise; keep an eye out for:
- Infrastructure development: Infrastructure can improve the area’s connection. A newly constructed highway or metro station, for example, can cause immediate property price increases in the surrounding area. The area is predicted to have significant economic development potential in the future.
- Building an additional hospital, a school, and an entertainment complex, for example, will boost the value of the surrounding real estate.
- Direct from the government and real estate law: The real estate value fluctuates due to policies on investment, home acquisition, taxation, and economic development in each area.
Real estate appraisal necessitates a great deal of expertise, time, and effort. Homebase can offer significant resources to your real estate investing process. For any questions you may have; call Homebase at +84 94 823 00 33 or visit their website at http://homebase.com.vn/.