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Real property valuation

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) contri- butes to higher efficiency (The State) Aristoteles (384 – 322 BC)

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Real property valuation

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  1. Real property valuation Valuation Methods Valuation Theory Value Theory Valuation is both aScience and an Art!

  2. 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)

  3. 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)

  4. Value theory Background factors: The Swedish Hand-bookFastighetsvärdering (RealEstate Valuation): - Utility/Benefit- Scarcity- Need- Use/disposition rights- Transfer rights

  5. Value theory Background factors:The Appraisal of Real EstatePart I, Chapter 2 page 19: - Utility/Benefit - Scarcity - Desire - Effective purchase power

  6. Value theory Background factors - a summary: - Utility/Benefit - Scarcity - Desire/Need - Effective purchase power - Use/disposition rights - Transfer rights

  7. Value theory • - Utility/Benefit • - Scarcity • - Desire/Need • - Effective purchase • power • - Use/disposition rights - Transfer rights • The first twofactors are related to thesupply side of economy and humanbehaviour, the two next to the demand side of economy and human behaviour

  8. 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

  9. Real property valuation • Valuation is both a Science and an Art! • Valuation includes componentsand knowledge of: • -mathematics • -statistics • -physical (land) planning • -urban planning • -ruralplanning/agriculture • -building construction • -sociology/human behaviour • -common sense/feeling

  10. Real property valuation • Literature: • Handouts • The Appraisal of Real Estate: Part 1 Fundamentals • Chapter 2 The Nature of Value (pages 19 – 31)

  11. Real property valuation Valuation Methods Valuation Theory Value Theory Valuation is both aScience and an Art!

  12. 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)

  13. Seller Buyer Buyer´s yield value Area for presumptive transaction Seller´s yield value Relation between subjective yield value and market value

  14. 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.

  15. 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

  16. 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)

  17. 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

  18. Valuation methods Price = Value = Cost (The Appraisal of Real Estate, 12th edition, Chapter 2 page 19 -20)

  19. Definition of market value (1) Number of transfers Price Market value The most probable price of the property on the open market

  20. Definition of market value (2) Assdderqwrsdf 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 arm´s-length transaction” • “ after proper marketing” • “ wherein the parties had each acted knowledgeably” • “ and without compulsion”

  21. 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!

  22. 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

  23. 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 Ek Buyer: Mrs Alm Date: 04-09-15 Price: 1 200 000 etc.

  24. Income capitalisation approach (1) SEK/ USD Remaining value Yearly net income . . . . etc 0 1 2 3 n Year The current value of future yearly net income and remaining value at the end of the calculation period

  25. Income capitalisation approach (2) 4 methods: • Sales price / square meter • Sales price coefficient • Gross capitalisation factor • Net capitalisation percent

  26. Information needed • Information about the real property: • Land use • Land area • Building: size, age, standard etc. • Yearly costs and incomes • Other special conditions

  27. The cost approach SEK/ USD Replacement costs Depreciation 3.5 %/year Cost value Cost of land Age (years) 0 10 Replacement costs 1 000 Depreciation 10 years 3,5 % - 350 Cost of land 200 Cost value 850

  28. 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

  29. Real property valuation • Notice - a frequent mistake ! Economics Mathematics Statistics GIS Land planning Sociology Common sense Others

  30. Real property valuation Recommendation - a balanced and appetizing mix ! Economics LandplanningSociology Mathematics Statistics GIS Others Common sense

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