The Valuation of the Luxury Property in Italy
In this section we will present a brief description of the principal methods that are used to value a luxury property in Italy. Given the complexity of the subject this description is not exhaustive and we recommend that readers carry out further research on the subject using more specific documentation.
According to the Bank of Italy, the value of a property is “the estimated amount at which a property would be sold on the date of valuation in a transaction between a seller and a buyer under normal market conditions after an adequate commercial promotion in which the two parties have acted with knowledge and prudence, and without any obligations”.
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The market value is estimated using the application of procedures and assessments relating to the condition of the property and the probable circumstances under which the property is sold on the open market.
The principal methods used to estimate the market value of a property are as follows:
- The market comparison approach
- The income approach
- The cost approach
The choice of the method used depends on the availability of information, the circumstances of the market and the condition of the property to be valued. In the next section we will present a summary of the most utilized methods for calculating the market value of a property, taken from the “Codice per la valutazione degli immobili” published by ABI.
The Market Comparison Approach
The market comparison approach is based on the collection of market prices and other characteristics of properties that fall within the same market segment as the property to be valued.
When the information about this segment of the market is available, the method of market comparison provides the best estimation of the value of a property at any given time. The limitation of this approach is that it strongly relies on the specific market conditions at a certain point in time (for instance during market “bubbles” when property values are inflated) and therefore it may indicate a value significantly different from historical data and subject to a correction at a later point in time.
Following the collection and verification of property information, a set of comparable properties is then used to value the chosen property.
The Income Approach
The income approach is based on the capitalization of the income of a property and is therefore suitable for the valuation of properties which will produce a yield.
In the income approach, both the quantitative values, for example the rental amounts and the property characteristics and the qualitative information (for instance the terms and conditions of the contractual agreement) are collected.
The time projection of the property yield should be appropriate and reasonable, under the fair assumption that the property is managed by an efficient operator or a competent administrator.
The income approach includes procedures to analyse the capacity of a property to generate monetary benefits and the possibility to convert these benefits into capital gains.
The financial method can be performed in three different ways:
- The procedure of direct capitalization
- The procedure of financial capitalization
- The analysis of discounted cash flow
The first two methods are based on the capitalization rate which is obtained dividing the rent by the property price. In both cases the rate is calculated net of expenses.
The direct capitalization procedure directly converts the annual market rent of the property into the market value of the property itself, dividing the rent by the capitalization rate.
The procedure of financial capitalization takes into account the series of annual rents and the resale value of the property at the time of sale.
The discounted cash flow analysis calculates the present value of the property cash flows at the valuation date. The cash flow is composed of the inflows and outflows of the property that is being valued. The current net value can refer to the whole property or to one of its independent parts.
The Cost Approach
The cost method is based on estimating the value of the area that has been built upon and the cost of reconstructing the existing building, also taking into account any depreciation due to age or disuse. In other words the replacement cost can be estimated as a the cost of substituting the building with a new one with the same features and functions.
The cost of redevelopment is comprised of the cost of the construction and of other expenses (infrastructure costs, authorizations and permits, professional fees etc.). The redevelopment cost includes the net profit of the construction company as well as the cost of demolition of the existing building.
The depreciation regards the physical impairment, the functional impairment and the economic obsolescence of the building. The cost method can be used for the valuation of properties susceptible to re-development (new constructions or renovations).
The Cost factors
In the tables below we provide an indication of the % variation to apply to the average price of the properties located in the same area.
The value per square metre that is obtained applying those variations has to be multiplied by the total surface area of the property, which includes internal walls and other surfaces like gardens, parking spaces etc… (the latter ones have to be discounted by an appropriate coefficient).
Other factors that have to be considered are:
- Property conditions
- Amenities
- Open spaces
The Negotiation
Properties do not have fixed price tags and you may be able to agree on a different price than that which is offered with a little skilled bargaining. It is important to get the opening offer right as this will play an important part in the amount you will eventually pay. Generally, it is advisable make an opening offer of about 5-10% less than the estimated value, regardless of the asking price. Be aware of the fact that the asking price is often set higher than the market price (though this can vary significantly case by case) in order to encourage a higher opening offer; you are expected to negotiate.
Always remember that the percentage of discount obtained by the buyer on the asking price is not completely significant in the assessment of whether the property has been bought on fair or favourable terms, as it all depends on how reasonable the asking price was in the first place. It is therefore critical to consider the estimated value rather than the asking price.
Unless there is an unbridgeable gap between the estimated value and the asking price, the two parties take the initial offer as a starting point for further negotiations until an agreement is reached.
The negotiation is influenced by different factors, these are the most important:
- How many other people are interested in the same property? If you are the only one you are in a strong negotiating position and the seller will probably accept a lower price. If there are two or more parties making offers the seller and their agent will be less flexible during negotiations and it may be sensible to offer the asking price.
- How quickly does the vendor need to sell? If they need to sell quickly, they will be more likely to accept a lower sum than the asking price.
- How long has the house been on the market? If the vendor is having difficulty selling the house they may be more likely to accept a lower offer. Check whether the asking price has dropped since the property was put on the market.
This is a very brief and basic list of tactics and it is worth finding out more on the subject of negotiation. However, if you put these ideas into practice you will have a far greater chance of concluding a successful deal:
1. The key to a successful negotiation is to have as much information as possible so it is important to ask many questions throughout the negotiation. Some of the most useful questions to ask the agent or seller are:
- How long has the property been on the market?
- How many offers have been made on the property to date?
- How was the asking price calculated?
- What price do you think the vendor would accept?
- Why are they selling?
- How come they have not had any offers (if applicable)?
- If the seller is moving to another area, is there any particular reason why?
2. In a negotiation it is important to carefully consider the objectives and the necessities of your counterparty. For example, the developer may have reduced margins for negotiation, while the agent could be on your side and convince the seller to lower the price; on the other side a private seller with a certain urgency to close the deal may accept a “take it or leave it” offer.
3. Before you enter the negotiation you must commit to a ceiling price which you cannot exceed. This will be based on the data you have accumulated and the discount or premium you are willing to pay. If you stick to this, you cannot ‘lose’ the negotiation even if you do not come to an agreement.
4. Never make your first offer the asking price or your ceiling price. You may want your first offer to be declined– if it is accepted you know you probably could have acquired the property for less.
5. Make any increases in your offer in decreasing increments – e.g. €5m, €5.5m, €5.75m, €5.9m. This will give the buyer an indication that you are coming to the end of your threshold. Also if you make large increases in your bid the seller may think, rightly or wrongly, that you have more money available and may demand more.
6. Always ask yourself: “What can I offer the seller that would be of huge value to them, but of little cost to me?”. Aside from any eventual discounts on the price which depend on the specific negotiation, before arriving at the signing of the ‘compromesso’, the buyer and the seller can also negotiate other factors such as the payment schedule (and currency), any outstanding fees, the rectification of any unauthorized building or renovations, the eventual leaving of any furniture and appliances (for example the kitchen), etc…
The Costs
Below is a table of the costs involved in buying a property in Italy. These costs remain the same regardless of the nationality of the buyer:
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