valuation report
DESCRIPTION
ITS ABOUT VALUATION OF PROPERTY.TRANSCRIPT
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SWEDESURVEY
Real property valuation
Valuation is both aScience and an Art!
Valuation Methods
Valuation Theory
Value Theory
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Value theory
Platon (427 – 347 BC)-- division of labour (specialization) contri- butes 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 dis- tinction between utility value and ex- change 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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SWEDESURVEY
Value theory
Background factors:The Swedish Hand-bookFastighetsvärdering (RealEstate Valuation):
-- Utility/Benefit- Scarcity- Need- Use/disposition rights- Transfer rights
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Value theory
Background factors:The Appraisal of Real EstatePart 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 thesupply side of economy and humanbehaviour, 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 people´s 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 componentsand 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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SWEDESURVEY
Real property valuation
Valuation is both aScience and an Art!
Valuation Methods
Valuation Theory
Value Theory
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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 valueand market value
Seller Buyer
Seller´s yield value
Buyer´s yield value
Area for presumptive transaction
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Valuation theory
-Classical scholars:-Smith-Ricardo-Malthus- -Their basic theory was a sort of“price theory” where they empha-sized the influence of productioncosts on the value but where thedemand factor was supressed.
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Valuation theory
-The classical scholars could not suffi-ciently explain many valuation problems and the Neo-classical scholars appeared:-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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• 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
Valuation Theory
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Valuation methods
Price = Value = Cost
(The Appraisal of Real Estate, 12th edition, Chapter 2 page 19 -20)
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Numberof
transfers
Price
Market value
The most probable price of the property on the open market
Definition of market value (1)
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Definition of market value (2)
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”
Assdderqwrsdf r r w w wf w h tjh eyh h rth rt t er rtyr r rth dr
Market value definition:
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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 aremarket 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– Price– Date of sale– Seller– Buyer
• Information about the real property– Land use– Land area– Building: size, age, standard etc.– Other special conditions
Seller: Mr EkSeller: Mr EkBuyer: Mrs AlmBuyer: Mrs AlmDate: 04-09-15Date: 04-09-15Price: 1 200 000Price: 1 200 000etc. etc.
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Income capitalisation approach (1)
SEK/USD
Year1 2 30 . . . .etc n
Remainingvalue
Yearly netincome
The current value of future yearlynet income and remaining value atthe 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
Age (years)0 10
Depreciation 3.5 %/year
Replacementcosts
Replacement costs 1 000Depreciation 10 years 3,5 % - 350Cost of land 200Cost value 850
Cost of land Costvalue
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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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SWEDESURVEY
Real property valuation
Notice - a frequent mistake !
Mathematics Statistics
GIS
Economics
Common sense
Others
Land planningSociology
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Real property valuation
Recommendation - a balanced and appetizing mix !
Mathematics Statistics GIS
Economics
Common sense
Others
Landplanning
Sociology