What is Real Estate Valuation, and How Does it Work? IEI Avalúos Explains

In an exclusively interview with SiiLA, Deniyolanda Medina and Manuel Ruíz, specialized consultants in property, business, and intangible valuations at IEI Avalúos, discussed the importance of appraisals and the valuation process. Both are renowned experts in their field and have been invited as guest lecturers to SiiLA ACADEMY, the largest and most comprehensive program of courses in the commercial real estate sector in Mexico, scheduled for May 2023.

According to both specialists, valuation is a professional opinion of value on a previously identified property. It’s important to remember that value is an economic concept that reflects the most probable price of a good or service in a certain time and context. In other words, it involves estimating the value of a good based on its use. This facilitates informed decision making and allows the determination of the price of an asset.

Given the above, valuation is essential for the economy since it provides information on the value of goods and services, particularly for the real estate sector. Knowing the value of a property based on its highest and best use is a matter of utmost importance to market players.

How does the valuation process work?

According to Manuel Ruíz, an expert in the field, the first thing to understand is that appraisals arise from a need. Depending on the needs of the client (company or individual), the appraisal is then structured normatively and methodologically.

“The valuation must be useful for the client based on their specific need, be it selling a property, making tax payments or resolving a legal matter, among others. These needs define the purpose of the appraisal, and with this the base regulations and methodology for the appraisal are established”, explained Deniyolanda Medina.

IEI Avalúos' specialists have outlined four main stages in the valuation process. The first stage involves defining the scope of the valuation by understanding its intended use. Next, data on the market and the property or service being valued is collected and analyzed, which includes comparing data. For real estate properties, this entails visiting them to assess their characteristics and factors such as their utility, state of conservation, and remaining life.

In the third stage of the valuation process, the analyzed and processed data is used to apply appropriate valuation methodologies and base regulations. The aim is to arrive at an accurate and objective estimate of the value of the asset being appraised.

Once the valuation methodologies have been applied, the fourth stage involves carrying out reasonableness exercises. These are used to contextualize the calculation of value and ensure that it is suitable for the intended scope and purpose of the valuation.

Finally, the results of the valuation process are summarized in a comprehensive valuation report. This report details all aspects of the valuation process, presents the final value estimate, and provides supporting evidence and analysis for the estimate.