The Problems of Estimating Market Value in a Small Real Estate Market. The Case of Estonia

The Estonian real estate market is considered to date back to the years 1991/1992, when ownership reform enacted the private ownership of land. Real estate services, including buying and selling and valuations, were started in Estonia in 1992 when the first real estate companies were founded. Over the last ten years, the amount of valuations has increased rapidly due to the fast development of the real estate market. Today the major clients for valuations are banks; and the most commonly assessed value is the market value. The paper analyses the opportunities and problems of using different valuation methods in small and rapidly growing markets. The widely used methods for estimating the market value are the sales comparison approach and the income approach. The comparison approach is used more to estimate the market value of dwellings and land. The use of this method is limited in the case of income-producing property, because the number of transactions is very small. Therefore, the appraisers use the direct capitalisation method and DCF analysis. Problems may arise with selecting the right capitalisation rate and yield rate. Analysis of evaluation reports shows that the yield rate and capitalisation rate have been misused to estimate the market value. The paper concentrates on how to find the capitalisation rate using different methods and the investigation of the effect of the results on the assessment of market value.