Most people, when buying real estate, require finance and the financial institutions carry out a valuation, most usually by registered valuers, in order to ascertain the property’s value.

Based on the Central Bank instructions to the Banks, the borrower must contribute a minimum 30% of the value of the property and the financier the other 70%. Usually the 30% (in case of permanent residences it is reduced to 20%-25%) is calculated including in addition to the acquisition cost the transfer fees (not adhered to by all financiers). So if you buy something around €100.000 + €7.000 transfer fees (total €107.000) the borrower must contribute €32.100 as a minimum. Some financiers go the other way around and if the valuation of the property is (instead of €100.000) €120.000, they calculate the financier’s contribution at 70% on the €120.000 i.e. €84.000 and with the purchase price of €100.000 the borrower is required to contribute only €16.000, i.e. 16% of the purchase price. So the situation is not at all clear and it depends on the financer how it handles it. In terms now of the financed amount, usually Banks adopt 80% as security value (in the above case €80.000) in order to assess their own financial contribution, whereas in some cases (Co-Ops) this 80% is reduced to 60%-50%. So notwithstanding the financier’s contribution methodology, the financier will not exceed also the amount of loan in relation to the market value (less 20% etc). The valuer does not have to take into consideration necessarily the purchase price or the actual building cost of a property, since the definition of the value is “how much the property can fetch in the Open Market” a different approach to the cost. So if you are buying a property with costly features/or a design/location not in demand by the wide market, the financier will look into a different value as opposed to your cost. A 1.000 sq.mts. villa in a remote village for example, notwithstanding that it might have costed you €700.000, due to the lack of demand, its value may be assessed only at €500.000. This is more so nowadays where the market is slow, values are reducing and buyers are few and in-between. Usually if the valuer, is particular, it will provide the following analysis:

Replacement cost €700.000
Less for limited demand €200.000
Open Market Value €500.000
Forced Sale Value €400.000

The forced sales value is not usually adopted although in our opinion this is what a financier should adopt as the basis of his calculation (most financiers opt for the market value).

In case of shares in a property, i.e. there are 3 houses and the title refers to one house as 1/3rd share of the whole, its value will be reduced by approximately 10% of the property’s value assuming that it has a separate title e.g.

1/3rd share assuming an individual title €100.000
Less for share €10.000
Open Market Value €90.000
Forced Sale Value €72.000

The forced sales value is usually 20% below the market value in most cases.

Added to the above, all financiers insist that the buildings are insured, so that their security, in terms of value, is retained in the event of damage. This replacement cost (i.e. to build the building as new based on quality and materialis as is and without deducting depreciation) is mainly calculated as follows - Say cost to build €100.000, the insurable value is assessed as follows:

1. Cost of demolition and clearance. €10.000
2. Cost to rebuild €100.000
3. New fees and permits €10.000
4. VAT etc etc €20.000
Replacement cost €140.000

You appreciate that will incur increased insurance fees (vis-à-vis the €100.000 above actual cost) and it provokes complains from the borrowers, but if something happens you can rest assure that the Insurance Co will re-examine the actual replacement cost by comparing to what you have insured. So in the above example if you have insured your property for €100.000 (instead of €120.000) the insurance co will pay you approximately 17% less even for small things such as damaged wall etc. In addition if you insured your property a few years ago, you need to reassess the replacement cost of the property from time to time. What is also strange is, that you might find that in certain occasions, the value of a property is less than its insurance cost. This is so for aged or low priced properties. If we take as an example an aged apartment of a low value, e.g. for 100 sq.mts. €80.000, its insurable/replacement cost value is at least €100.000. This raises a lot of arguments and it is difficult to persuade an insured the logic behind this. Nevertheless most financiers/insurance cos are happy to meet with the insured requirements, since they have nothing to lose (they will pay less in the event of under insured properties). The fact that the financer’s valuer made an assessment on behalf of the insurance co/financier, this does not necessarily means that the financier/insurance co has any responsibility.

So it is not a clear-cut situation and care is needed since most of us treat the insurance as a remote possibility, which “will never happen to me”.

Please bear in mind that in cases of complexes with common use areas, in addition to the individual units cover, you need to cover the common facilities, such as the common swimming pool, private roads, retaining walls etc etc - This could be undertaken by the administrative committee although strictly speaking in case of comprehensive development, the whole project should be insured as one (required as such by the law). If not (we have no experience on this) the insurance co may refuse to pay at all - notwithstanding the fact that it was happy to take on your insurance.

So financing of a purchaser/building and the related to it insurance, is not as straight forward case as one may thing, but the fact that we do not have major earthquakes and natural disasters, as well as limited number of fires for buildings etc, has caused in Cyprus a very loose situation relating to insurance amount, which could become very dangerous in terms of financial loss by all concerned (including that for the financiers) if something happens.

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