Appraisal of real estate for sale: expert appraisal or book value?

When selling real estate, it's important to accurately determine its value for proper financial calculations between parties. Unlike regular goods and services, real estate valuation is based on specific amounts, considering the usually significant value of such properties and the taxes involved in their sale. The law stipulates specific conditions for determining this value.

This article will explore how real estate appraisal is conducted, who carries it out and provide information on various property valuation methods. Whether you're an owner or a buyer, this information will help you understand the key aspects of property valuation methods and perform them more effectively.

Types of Property Valuation Methods: What and Whom to Choose?

From practice, the following methods for determining real estate value can be distinguished:

1. Professional Real Estate Appraisal: This method involves assessment by a professional and certified valuation entity, possessing the necessary documents to legally perform such activities. Professional appraisals can be either compulsory or voluntary. The appraiser provides a real estate valuation report, concluding the property's value. The calculation of real estate value is a technical task handled by the appraiser using legislated approaches and methods. Hence, the property's value depends on its area, location, and technical condition.

2. "Balance Sheet Value" of the Property: If the property is owned by a legal entity, its "balance sheet value" can be used. This refers to the value determined by accounting rules. It requires a certificate signed and sealed (if applicable) by the legal entity.

3. Market Value: This reflects the property's value according to current market prices. Market value determination is influenced by a range of factors. Typically, market valuation is considered the most realistic (fair) and is usually higher than the other options.

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When is Professional Real Estate Appraisal Necessary?

Expert real estate appraisal is required when an individual is involved in a property sale and earns income from it. This requirement for expert appraisal in transactions between individuals is established by Ukraine's Tax Code and the Procedure for Notarial Actions by Ukrainian Notaries, as per Ministry of Justice Order No. 296/5 dated 22.02.2012.

A notary, when certifying a real estate sale or exchange transaction, will request an appraisal report. The taxes will be calculated based on the value stated in this report. Without it, the notary cannot authenticate the transaction. It's important to remember that real estate sale agreements need to be notarized. If you have ever sold or bought a property from an individual, you are likely familiar with the requirement of an appraisal report. For example, we recently provided comprehensive support for a real estate sale for our client, where the seller was abroad and had to come to Ukraine just for signing the contract and finalizing the payment. Among other aspects, we assisted the client in obtaining the appraisal report.

It's important to note that the sale price stated in the contract must not be lower than the property's appraised value. The appraisal report is uploaded to a relevant database and can be subject to verification. Therefore, appraisers must conduct their assessments according to specific methodologies, and failure to adhere to these can result in losing access to the database and consequently, their ability to work. Appraisers typically do not take such risks.

However, the expert appraisal amount can be approximate or slightly less than the amount agreed upon by the parties. The parties are free to set a higher price in the contract than the appraised value. This is often necessary when:

• The seller wishes to demonstrate the actual price of the property, declare the income, and pay the corresponding taxes to use these funds legally.
• The seller intends to transfer the funds abroad and needs to validate the entire sum's origin.

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Conducting a Real Estate Appraisal Before Selling

If the real estate appraisal is performed by an appraiser, it's necessary to provide the appraiser with relevant property documents. Typically, these include the property's title documents, a technical passport, and the applicant's identification documents (such as a passport and identification code, or ID card, or a power of attorney for representatives along with their passport documents).

The appraisal is carried out following a specific methodology used by professional appraisers, resulting in a property appraisal report with an assigned value. The criteria and methodology of the appraisal are determined by the appraisers themselves. As legal professionals, we facilitate obtaining such appraisals, overseeing the conditions under which they are conducted, and ensuring they align with your interests and plans.

Please note! For purposes like sale, exchange, gifting of property, or other forms of alienation, the appraisal report should be no older than six months.

When is Property Appraisal Unnecessary?

Legislation requires an expert appraisal of real estate if an individual is involved in the contract (as a seller). This appraisal is necessary for calculating and paying taxes; without it, a notary cannot authenticate the deal or carry out the re-registration of the property in the real estate rights registry.

If the contract is between legal entities, an appraisal report is not required, except in cases involving state or communal property, which follow a separate procedure.

An appraisal is also not needed if the transaction doesn't result in taxation. This could be the case in situations like inheriting property from first or second-degree relatives or when gifting property to relatives of the first or second-degree.

How Long Does the Real Estate Appraisal Process Take?

The appraisal of real estate typically takes a few working days. If an urgent appraisal is required, appraisers who can perform the assessment more quickly can be found.

What Documents Are Required for Real Estate Appraisal?

To carry out a real estate appraisal, the following documents are usually needed:

• Legal documents establishing property rights, such as a sales contract, inheritance certificate, gift deed, etc.
• The property's technical passport.
• Applicant’s documents: a passport and tax identification number. If the appraisal is requested by a representative, then a power of attorney and their identification documents are needed.

When to Use "Balance Sheet Value" for Property?

A balance sheet value certificate for real estate can be used when property is being transferred between legal entities. As previously stated, in such instances, an expert appraisal of the property can be foregone (except in cases involving state or communal property, where a different procedure applies). However, parties can opt to conduct such an appraisal; it’s not prohibited. It's important that the balance sheet value is correctly determined by an accountant, as income from the sale of real estate will be taxed in accordance with the Tax Code of Ukraine. This does not apply to state or communal properties.

Sometimes unique situations arise that necessitate legal expertise. For instance, we had a client interested in whether a legal entity could sell real estate to an individual at the balance sheet value. Some lawyers advised it was possible, while others disagreed. After conducting a comprehensive analysis and consulting with notaries, we concluded that there are no restrictions or requirements for obtaining an expert appraisal in this case, as the legal entity is the seller and income earner, thus liable for tax payments. Notaries are prepared to certify such transactions at the balance sheet value.

If you or your business have real estate-related queries, our specialists can assist you in various ways:

• They will offer consultations on real estate sales or create a strategy specific to your project, providing expert advice and recommendations.
• They will handle all aspects of the sale, including the conclusion of the transaction, preparation of necessary documentation, and ensuring its legality.
• They will guide you through the process of selling or acquiring property, offering support at every step and ensuring all legal requirements are met.
• They can help resolve complex real estate issues, be it disputes, legal problems, or other nuances that may arise during the ownership or management of the property.

Reach out to our lawyers for professional assistance and to ensure legal safety in your real estate dealings!

For information on the pricing of our real estate legal services, please refer here.