Three siblings inherited a house. One heard from an estate agent that it is worth a certain amount. Another saw a similar listing online for a much higher amount. The third wants to keep the house and thinks it is worth much less. Who is right? Perhaps none of the three.

A property's value is not an opinion, nor is it the price in the listing. It can be estimated technically, with method, a standard and market data. Here you will learn how property valuation, expert witness work and due diligence for buyers work.

Price, value and when to get a valuation

First, an important distinction. Price is the amount at which a deal was closed, or the amount someone is asking. It depends on haste, negotiation and the wishes of the parties. Market value is the most probable amount for which the property would be traded, under normal conditions, between well-informed people under no pressure. That is the value a technical valuation estimates.

And when do you need one?

  • When buying and selling, to negotiate with confidence.
  • In financing and bank collateral, because the bank needs to know what the asset securing the credit is worth.
  • In probate, division of assets and divorce, to divide the estate fairly.
  • In court cases, expropriations and rent disputes.
  • In insurance.
  • In company accounting, since companies must record the value of their properties.

In all these cases, what is asked for is the same: a well-founded value that someone else can check and that stands up to challenge.

The standard and the methods

In Brazil, asset valuation follows the standard ABNT NBR 14653. It is divided into parts: the first sets out the general procedures, the second covers urban properties and the third, rural properties. The standard recognizes several methods, and the valuer chooses the most suitable for each case.

  • Direct market data comparison method: the most widely used. It estimates value from similar properties for sale or recently traded in the same region. It is the preferred method whenever there is enough market data.
  • Cost method: adds the value of the land to the cost of rebuilding the structure, less depreciation for age and condition, and applies a factor reflecting market behaviour.
  • Income method: estimates value from what the property is able to generate, such as rent, and is widely used for commercial properties, warehouses and hotels.
  • Residual method: used for land with development potential. It starts from what could be built and sold there and works back to the value of the land.

The standard also defines degrees of substantiation and precision. The more data, the higher the quality of the research and the greater the rigour in treatment, the higher the degree the report achieves. Many banks and court cases require a minimum degree.

How a valuation is done

Let us follow a valuation using the comparison method, which is the most common.

It all starts with documentation: the title record, the IPTU property tax, the designs, if any. Then comes the inspection. The engineer goes to the property and records everything that influences value: the location, the size of the land and the building, the standard of finish, the age, the condition, the parking space, the position on the block and the surrounding infrastructure.

Next, the market research. The valuer collects data on comparable properties, for sale or sold, preferably in the same region and with similar features. Each item of data is checked: location, area, features and source.

Then comes the part that distinguishes a technical report from an opinion: the treatment of the data. Comparable properties are never identical. One is larger, another is newer, another is on a better street. The valuer uses statistical models, such as regression, to understand how much each feature influences price in that market and thus estimate the value of the property being valued.

The result is not just a number. It is a value accompanied by a range, with the statistical tests showing the model's reliability, the calculation record, the photos, the identification of each item of market data and the ART. Any other professional can retrace the path and reach the same conclusion.

Rural properties

For rural properties, the logic is the same, but the factors change. Part three of the standard considers bare land separately from improvements, such as houses, sheds, corrals, fences and dams, and from crops and pasture. And the value of the land depends on its own characteristics: land use capacity, relief, water availability, access, distance from consumer centres and the environmental and documentary situation, such as georeferencing and the environmental register.

This valuation is often requested by cooperatives and banks for rural credit and collateral, and also in the probate of families with properties in the countryside.

Technical report or price opinion?

A common question: what is the difference between a valuation report and an estate agent's price opinion? The agent's opinion is very useful for setting the listing price and handling a sale. A valuation report prepared by an engineer follows ABNT NBR 14653, sets out the methodology and the treatment of the data and has an ART. It is the document normally required by banks and companies and in many court situations.

Expert witness work and technical assistance

When a technical matter reaches the courts, such as a construction defect, damage caused by neighbouring work, a dispute over value or an expropriation, the judge does not decide alone. The judge appoints an expert, a professional trusted by the court, who carries out the assessment and delivers an impartial report.

And each party to the case can hire its own technical assistant. The assistant follows the assessment, submits technical questions that the expert must answer, and prepares an opinion analysing the expert's report.

In practice, having a good technical assistant makes a big difference: they translate the technical issue for the lawyer, make sure the right questions are asked and point out, with grounds, when something in the report does not hold up.

At BARRETO.eng, the engineer in charge works on technical expert assessments for court proceedings and as a technical assistant to the parties, always respecting the impediments of each case.

Due diligence: before you buy

And for those about to buy, the best time to discover problems is before signing. Real estate due diligence is a full investigation of the property before purchase, widely used for land, warehouses, commercial properties and development sites. It looks at four fronts:

  • Documentary: title record, encumbrances, certificates and consistency between what is registered and what exists.
  • Planning: what the legislation allows at that location.
  • Technical: the condition of the building, its standing with City Hall and the Fire Department, the installations and the real area, checked by survey.
  • Environmental: preservation areas, restrictions and signs of contamination.

The result is a report with the risks found and the impact of each, which serves to negotiate the price, demand corrections before purchase or, sometimes, walk away in time.

Common mistakes

  • Using the listing price as if it were market value.
  • Dividing an inheritance without a technical valuation.
  • Going into a court case without a technical assistant.
  • Buying a commercial property or a large plot without due diligence.

Frequently asked questions

What is the difference between price and market value?

Price is the amount actually asked or paid in a deal. Market value is the most probable trading amount under normal conditions, estimated technically by the valuation.

Which standard governs property valuation?

ABNT NBR 14653 (part 1: general; part 2: urban properties; part 3: rural properties).

What are the property valuation methods?

Direct market data comparison, cost, income and residual, chosen according to the property and the data available.

When do I need a valuation report?

Purchase and sale, financing and collateral, probate, division of assets and divorce, court cases, expropriation, insurance and accounting.

What is the difference between a court expert and a technical assistant?

The expert is appointed by the judge and acts impartially; the technical assistant is hired by one of the parties to follow the assessment, draft technical questions and issue an opinion.

What is real estate due diligence?

It is the documentary, planning, technical and environmental investigation of a property before purchase, which identifies risks and supports negotiation.

Does a valuation report have an expiry date?

It expresses value at a reference date; changes in the market or in the property may call for an update. Some institutions set their own time limits.

Does the valuation include an inspection?

Yes, the inspection is an essential part of the work.

Can the valuer be hired by the buyer or the seller?

Yes, but the report must be technical and impartial, regardless of who hires the valuer.