I just had a Whatsapp discussion with someone about the value of real estate appraisals.
Our office had a building lot in Pavas listed with a price tag of $95,000. A potential buyer had called numerous times in the past few weeks. She said she was interested in buying the building lot, but would not make an offer.
When we started messaging, I told her we had an accepted offer on the property. The offer was quite close to the asking price and accepted by both parties; the seller received a nice offer because it was the only building lot for sale in the whole subdivision. It sold within weeks, which is quite unusual in the Costa Rican real estate market.
The lady asked if someone had done an appraisal on the property. She was just fishing; the lot was sold, so the conversation wasn’t going anywhere. She insisted the price was way too high, even though it sold close to that asking price. She did not seem to understand that real estate is about supply and demand. In her opinion, real estate appraisals show the real value of the property.
But do they?
Property records
In the United States, for example, you can look up property values, history records and other valuable info easily through programs like US Realty Records.
In Costa Rica, we don’t have anything like this. Property sales are registered through a deed in the National Property Registry. Those data are public, but you need to know the owner information or property number to access the information. Sales data for a property owned in a corporation and transferred within the corporation will never be visible to the general public.
Therefore, nobody really has any access to property values and history records to be used for real estate appraisals. For the same reason, you won’t find any CMAs (Comparative Market Analysis) in Costa Rica.
Banks in Costa Rica use the loan amount to register the value of a property they lend on – so those data are no good to their own appraisers either.
Real estate values and data
Real estate values change all the time; finding fresh data requires an enormous effort. Without the fresh data, it is impossible to do correct and up-to-date real estate appraisals. So what do appraisers do to find the necessary data to do their job?
They do what any human being can do: surf around on the web and drive around the neighborhood looking for signs. They collect the data and try to get a general idea of land values in the area.
Appraisal methods
There are various appraisal methods used by appraisers in Costa Rica: the Ross-Heidecke, the Heidecke, the Ross, and the Kuentzle method. Real estate agents usually use the concept of replacement value, less a construction cost depreciation of 2 percent per year.
All these methods need up-to-date values to be able to come up with a sensible result. As I explained before, the necessary data for an exact result is not available in Costa Rica.
Guesstimate
As you can see, all these methods to do real estate appraisals are much like holding a finger in the air. As long as the National Property Registry doesn’t start producing data and making them public, real estate appraisals are not much more than a guesstimate.
Lenders
Banks and private lenders use real estate appraisals to find out what the Loan To Value (LTV) is. Banks are now lending on property sold by real estate developers at almost 100 percent. Private lenders often have real estate agents do their appraisals, and they use a “fire sale value.” Who do you think will get the short end of the stick?
Solution?
In my opinion, the best solution for getting a sensible real estate appraisal is to ask a seasoned real estate agent who has worked in a particular area for many years. Those agents usually know what properties in their area have sold for in the past.
In any case, the only real value is the price that a buyer is willing to pay for a property.
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Ivo Henfling founded the American-European Real Estate Group in 1999 — the first functioning MLS in Costa Rica with affiliate agents from coast to coast. You can read other articles like this on his blog. Contact Ivo at (506) 2289-5125 / 8834-4515 or at ivo@american-european.net.
