Real property valuation Valuation Methods Valuation Theory Value
- Slides: 24
Real property valuation Valuation Methods Valuation Theory Value Theory Valuation is both a Science and an Art!
Value theory Platon (427 – 347 BC) - division of labour (specialization) contributes to higher efficiency (The State) Aristoteles (384 – 322 BC) - on exchange, money, prices and value (Politics and Ethics) Adam Smith (1723 – 1790) - distinction between Utility value and Exchange value (An inquiry into the nature and causes of the wealth of nations, 1776)
Value theory Karl Marx (1818 – 1883) - connections to Aristoteles and the distinction between utility value and exchange value. The latter is a reflection of the labour which is spent on the specific commodity Marx claimed. (Das Kapital, 1867, 1885, 1894) Hernando de Soto (1940 - ) - on the causes to wealth differences in the world and why capitalism triumphs in the west but fails everywhere else. (The Mystery of Capital, 2000)
Value theory Background factors: The Swedish Hand-book Fastighetsvärdering (Real Estate Valuation): - Utility/Benefit Scarcity Need Use/disposition rights - Transfer rights
Value theory Background factors: The Appraisal of Real Estate Part I, Chapter 2 page 19: - Utility/Benefit - Scarcity - Desire - Effective purchase power
Value theory Background factors - a summary: - Utility/Benefit Scarcity Desire/Need Effective purchase power - Use/disposition rights - Transfer rights
Value theory - Utility/Benefit Scarcity Desire/Need Effective purchase power - Use/disposition rights - Transfer rights The first two factors are related to the supply side of economy and human behaviour, the two next to the demand side of economy and human behaviour
Value Theory • A consequence of: – Valuation factors for real property – – – Social ideals and standards Economic activities and trends Government regulations and activities Physical or environmental forces Location factors • Depends on people’s desires • Depends on future benefits • The value can not be calculated, it can only be estimated
Real property valuation Valuation is both a Science and an Art! Valuation includes components and knowledge of: -mathematics -statistics -physical (land) planning -urban planning -rural planning/agriculture -building construction -sociology/human behaviour -common sense/feeling
Real property valuation Literature: - Handouts - The Appraisal of Real Estate: Part 1 Fundamentals Chapter 2 The Nature of Value (pages 19 – 31)
Relation between subjective yield value and market value Seller Buyer´s yield value Area for presumptive transaction Seller´s yield value
Valuation methods Price = Value = Cost (The Appraisal of Real Estate, 12 th edition, Chapter 2 page 19 -20)
Definition of market value (1) Number of transfers Price Market value The most probable price of the property on the open market
Definition of market value (2) Market value definition: - - Some key elements: “ asset” “ the estimated amount” “ a property should exchange” “ on date of valuation” “ between a willing buyer” “ a willing seller” “ in an arm´s-length transaction” “ after proper marketing” “ wherein the parties had each acted knowledgeably” “ and without compulsion”
Valuation Methods • Sales comparison approach • Income capitalisation approach • Cost approach When searching for a market value, the income and cost methods are market simulating methods!
Sales comparison approach • Identification and selection of real properties purchased in a comparable market area • Objects are made comparable. . . • . . . and adjusted according to purchase dates (price trends) or other differencies • Mean price of the selected purchases = estimated market value
Information needed • Information about the purchase Seller: Mr Ek Buyer: Mrs Alm – Price Date: 04 -09 -15 Price: 1 200 000 – Date of sale etc. – Seller – Buyer • Information about the real property – Land use – Land area – Building: size, age, standard etc. – Other special conditions
Income capitalisation approach (1) SEK/ USD Remaining value Yearly net income 0 1 2 3 etc. . The current value of future yearly net income and remaining value at the end of the calculation period n Year
Income capitalisation approach (2) 4 methods: • Sales price / square meter • Sales price coefficient • Gross capitalisation factor • Net capitalisation percent
Information needed • Information about the real property: – – – Land use Land area Building: size, age, standard etc. Yearly costs and incomes Other special conditions
The cost approach SEK/ USD Replacement costs Depreciation 3. 5 %/year Cost value Cost of land 0 10 Replacement costs Depreciation 10 years 3, 5 % Cost of land Cost value Age (years) 1 000 - 350 200 850
Information needed • General information – Average replacement costs – Depreciation - time and percent – Average value of land • Information about the real property – Land use – Land area – Building: size, age, standard etc. – Other special conditions
Real property valuation Notice - a frequent mistake ! Economics Mathematics Statistics GIS Land planning Sociology Common sense Others
Real property valuation Recommendation - a balanced and appetizing mix ! Economics Land planning Mathematics Statistics GIS Sociology Others Common sense
- Value creation value delivery value capture
- Fixed income valuation methods
- Journal entry for revaluation of assets
- Contractors method of valuation
- Term and reversion valuation
- Red book property valuation
- Legal and general valuation
- Sliding scale valuation method
- Inventory valuation grade 12
- Bond price formula
- Balance sheet valuation methods
- Livestock valuation methods
- Revealed preference methods of environmental valuation
- Commutative vs associative
- Doctrine of blending
- Chemical property of matter
- Direct wax pattern technique
- Legal status of company
- Introduction to valuation the time value of money
- Zakia mahasa
- Selector property value
- Gross annual value
- Associative and commutative property of addition
- Immobility real estate
- From where real numbers start