Real property valuation

Valuation Methods
Valuation Theory
Value Theory
Valuation is both a
Science and an Art!

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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)

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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)

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Value theory
Background factors:
The Swedish Hand-book
Fastighetsvrdering (Real
Estate Valuation):

--

Utility/Benefit
Scarcity
Need
Use/disposition
rights
- Transfer rights
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Value theory
Background factors:
The Appraisal of Real Estate
Part I, Chapter 2 page 19:

- - Utility/Benefit
- - Scarcity
- - Desire
- - Effective purchase
power
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Value theory
Background factors - a summary:

Utility/Benefit
Scarcity
Desire/Need
Effective purchase
power
- Use/disposition
rights
- Transfer rights

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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
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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 peoples desires

Depends on future benefits
The value can not be calculated,
it can only be estimated

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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
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Real property valuation

Literature:
- Handouts
- The Appraisal of Real Estate:
Part 1 Fundamentals
- Chapter 2 The Nature of Value
(pages 19 31)

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Real property valuation

Valuation Methods
Valuation Theory
Value Theory
Valuation is both a
Science and an Art!

SWEDESURVEY

Valuation theory
-Aristoteles (322-284 BC)
-- subjective utility value

-Adam Smith (1723-1790)

-- utility value, exchange value

-David Ricardo (1772-1823)

-Thomas Malthus (1766-1834)

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Relation between subjective yield value

and market value

Seller

Buyer

Buyers
yield value

Area for presumptive transaction

Sellers
yield value

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Valuation theory
-Classical scholars:
-Smith
-Ricardo
-Malthus
-Their basic theory was a sort of
price theory where they emphasized the influence of production
costs on the value but where the
demand factor was supressed.

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Valuation theory
-The classical scholars could not sufficiently explain many valuation problems
and the Neo-classical
appeared:

scholars

-Stanley Jevons (1835 - 1882)

-Leon Walras (1834 - 1910)
-Alfred Marshall (1842 - 1924)
-Ernst Laur (1871 - 1964)
-The most prominent feature of their ideas
were The margin theory
(Margin utility, margin cost and margin
income)
The demand component was important
for the value, not only the production cost
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Valuation theory
-Modern economists with
influence on value theory
and valuation theory are:
-Frederic Babcock
-(The Valuation of Real Estate, 1932)

-Richard Ratcliff
-(Modern Real Estate Valuation, Theory
and Application, 1968)

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Valuation Theory
Market value
The most probable price of a property
on the open market
Used in most cases
Net income value
The present value of future yearly net
income
Used e.g. for
- investment decisions
- market simulation
Cost value
Replacement costs minus
depreciation
Used e.g. for
- insurance compensation
- market simulation
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Valuation methods

Price = Value = Cost

(The Appraisal of Real Estate, 12 th edition, Chapter 2 page 19 -20)

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Definition of market
value (1)
Number
of
transfers

Price
Market value

The most probable price of the

property on the open market

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Definition of market
value (2)
Assdderq
wrsdf r r
w w wf
w h
tjh eyh h
rth rt t
er rtyr r
rth dr

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 arms-length transaction
after proper marketing
wherein the parties had each
acted knowledgeably
and without compulsion
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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!

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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

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Information needed
Information about the purchase
Seller: Mr Ek
Price
Buyer: Mrs Alm
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

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Income capitalisation
approach (1)
SEK/
USD
Remaining
value
Yearly net
income

etc . . . .

Year

The current value of future yearly

net income and remaining value at
the end of the calculation period
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Income capitalisation
approach (2)
4 methods:
Sales price / square meter
Sales price coefficient
Gross capitalisation factor
Net capitalisation percent

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Information needed
Information about the real
property:

Land use
Land area
Building: size, age, standard etc.
Yearly costs and incomes
Other special conditions

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The cost approach

SEK/
USD Replacement
costs
Depreciation 3.5 %/year
Cost
value

Cost of land

10

Replacement costs
Depreciation 10 years 3,5 %
Cost of land
Cost value

Age (years)

1 000
- 350
200
850
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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

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Real property valuation

Notice - a frequent mistake

Economics

Mathematics
Statistics
GIS

Land
planning
Sociology

Common
sense

Others

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Real property valuation

Recommendation - a balanced and
appetizing mix !
Economics

Mathematics
Statistics
GIS

Others

Land
planning
Sociology

Common
sense

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