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How to work out what a house is really worth

There are two ways you can get a house in Spain. One is to buy, the other is to rent. (OK, you could go and "borrow" a house from friends/relatives, but we're talking about a long-term commitment here.)

Most brits have had it banged into their skulls that buying is the best way to go: security, investment, the possibility of renting it out when you're not using it. All very nice in theory - and mostly true, for the UK. In Spain, the assumptions underlying these "facts" don't necessarily hold true. Take for example the idea that we're used to - that house prices will always rise. The UK is a small place, there's not much land available to build new houses on, and yet the demand, from single people buying (where before it was only couples/families), marriage break-ups necessitating two houses for 2 people, more people coming into the country and wishing to put down roots - all these lead to a high demand for the limited number of properties, which in turn pushes up the price. It's just supply and demand. In Spain, however, there are lots of houses in the countryside that were simply abandonded during the 70's and 80's - when the inhabitants discovered they could make more money as a waiter on the Costa's than they could as a goat-herd in their village. Add to this the somewhat unregulated boom in construction and the supply-demand balance in Spain is different: there's lots of choice for buyers and many houses are up for sale for years before being bought.

Another thing that skews the market in Spain is that houses for-sale are often second homes, or are owned by several people, jointly (for instance a group of brothers and sisters might have been left a house in their parents' will). Because they are under no pressure to sell, they are frequently happy to wait until someone comes along who's willing to pay the price they're asking. Some even put up the price each year, as they hear that house prices are rising.

Let's take a moment to talk about making money. For the sake of the example, let's say you have €200,000 to invest (just to be perfectly clear - I'm not offering financial advice here, just giving an example of how things might work. Do not try this at home). You have many options of what you can do with it. You could, for example, leave it in the bank collecting interest. if you find an account that pays 5%, your €200k will make you 0.05 * 200,000 = €10,000 per year. Obviously there are taxes you'll have to pay, but we'll set that aside for now (you'd have to pay tax on rental income, too), get an accountant to advise you here. Alternatively, you could use the cash to buy a house and let it out on long-term rental. Which option you choose depends on your view of the world - but let's just take a simple example: you'll invest the money in whatever (safe!) way gives you the highest return. So for house-renting to be worthwhile, it would have to make you more than the €10,000 that leaving the money in the bank would. That tells you what the rent on a €200,000 house should be. Add a little extra on for maintenance, taxes and legal fees and you have calculated a market rent for a property. We've all heard of the Buy to Let market, where people take out large mortgages to buy property to rent out. That tells you again that there's a link between the amount of rent you can expect and the price of a house. if rents are too low, people won;t buy houses and rent them, as they can make more by leaving their money in the bank, earning interest.



OK, back to finding out what a house in Spain is really worth. We've established that if people are being sensible, there's a link between what a house would be worth as an investment and the price you can buy it for. We can also see that if you have money to spend, if you can't make as much from rent as from leaving the money earning interest, there's little point buying a property - you'd be better off keeping the interest and using that to pay rent - you'd get more house for the money.

Does this work? Well, in Spain, no. First off, there are a lot of houses up for sale, which the owners just can't shift. As an alternative they sometimes rent them out until a buyer comes along. As I mentioned, it can take years to sell a property - I've seen statistics which say the average time taken to sell a house is 35 months: nearly 3 years. Because the house would otherwise be empty, the owners are willing to take whatever rent they can get - frequently far below the "market" rate, that we calculated earlier. If enough sellers are in this position, the effect is to push down rents in the whole area.
Secondly, sellers often set unrealistically high expectations on what their houses might be worth. Maybe they've heard stories about a neighbour who sold a property to a rich brit (the rumour is that all brits are rich, so are all germans and any other "outsiders" moving into an area). Apart from the possibility that the story is grossly exaggerated, it's remarkably hard to actually track down the people who made these deals. However, the folklore remains: house prices are high - you can make a lot of money from selling that old, dilapidated ruin your grandfather left you. Since the owners are in no hurry to sell, they will wait until a buyer comes along. Afterall it's not their fault prices are rising.

So, where does that leave a prospective buyer? You are faced with a wide range of houses to buy. However, each one is different from all the others: various sizes, facilities, locations. Some have sea views, some have pools. Some are in the heart of a village and others in picturesque countryside. Since you can't compare like with like, you can't make a rational decision: that house A is 10% better than house B, or that one just like house C sold last month for €280,000, so that's what this one's worth.
One thing you could try is asking how much a house would cost to rent. We've seen that some sellers are willing to take some money, rather than none at all. If you can rent a €280,000 house for €800 a month, then you're better off keeping your cash in the bank (or not taking out that mortgage) and using the interest to pay the rent. You can even use interest/mortgage rates to work out what the market value of the house really is, given the rent you agree on, and offer to buy it for that amount. if the vendor turns you down, just carry on renting and maybe wait for house prices to fall to realistic levels while your saved-up money earns you more.