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How do I know if the flat or house I want to buy is worth the asking price?

Property price and square-metre price when buying a house

When you buy a house, and especially if you are going to apply for a mortgage, it's natural to wonder whether the price is right? How can you be sure? In fact, this question affects both the buyer and the seller, as well as the tenant and landlord in the case of rentals, and your view will vary considerably depending on what your role is in each of these situations.

In any case, there are several objective formulas for setting a reasonable price for all parties.

How do you know if the price of the house you want to buy is worth what the seller is asking?

First and foremost, a property appraisal will be carried out by a professional to establish the price of the house based on certain parameters: location (existence of public transport, amenities, shops, leisure areas, etc.); height and orientation (flats on upper floors have more light, better views and less noise so the price will be higher, especially if they have a balcony); age and condition of the house (useful life is about one hundred years, although it is estimated that they lose 15% of their value five years after being built. However, a renovation can increase the value of a house by up to 15%, and up to 25% if it affects the layout. Real estate depreciates considerably over time, which can lead to a 25% variation in the price.)

You should also be aware that the appraisal doesn't cover factors which, although it may seem otherwise, do not influence the value of the property. For example, the price paid for the property in the past or an existing mortgage have no impact whatsoever.

How is the square-metre price calculated?

There are several methods you can use to calculate the square-metre price. For example, indicators such as the gross rental yield, the price earnings ratio (PER) and the average price of the area will give you a few clues. Let's take a closer look.

The gross rental yield, which is the percentage obtained by dividing the annual rental income by the property's sale price. Even if you are not thinking of renting, this index is very useful. Banco de España estimated a gross rental yield of 3.7% for the second quarter of 2020.

The price earnings ratio (PER) is another good benchmark. You can calculate it by performing the reverse operation, i.e. dividing the sale price by the annual rental price. This quotient will tell you how many years it would take to pay for the property (according to the gross rental yield, the PER would be approximately 324 months).

The average price of the area gives you another clue. This is obtained by dividing the purchase price by the property's square metres (gross floor area).

How is the equivalence between the rental and sale price established?

You can take two of these three figures (PER, sale price and rental price) to calculate the third one. Banco de España publishes the latest gross rental yield for Spain every quarter, so to calculate the third variable you only need reliable rental or sale data for a property with characteristics similar to your own property. Then it is simply a question of multiplying the monthly rental price by 324 months.

In any case, the key is to make sure you have all the necessary information before you make a decision.


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