Engineering Valuation - Real Estate

The Role of Valuation

• In real estate, "price" refers to the actual exchange price in the marketplace, while "market value" is an estimation of that price were the property to be sold in the market, and "calculation of worth" is used to assess the inherent worth to the individual or group of individuals.

Separation of Ownership and Use

• In many property markets, the ownership of property is separate from its use, and the price of exchange will be the same whether the purchaser has investment or occupation in mind.
• However, the view of the two groups of bidders (investors and owner-occupiers) will be different.
• Investors view worth as the discounted value of the rental stream produced by the asset, while owner-occupiers see the asset as a factor of production and assign to it a worth derived from the property's contribution to the profits of the business.

Worth of a Property

• The concept of the worth of a property is most important in markets that are underdeveloped in terms of liquidity and the separation of ownership and use rights.
• In such markets, most transactions are based on owner-occupiers' views of the worth of the properties, considering factors such as the contribution to business profit, as well as subjective issues like status and feelings of security.

Traditional Valuation Methods

Comparable Method

• The comparable method involves adjusting the sales price of comparable properties to the subject property to estimate its market value.
• The adjustment is made for differences between the subject and the comparables.
• A weighted estimate of value is formed by placing more emphasis on properties that are most like the subject property and have smaller adjustments to the selling price.

Development/Residual Method

• The development/residual method is used for estimating site value through comparable vacant land sales.
• Each comparable sale should be described, including data such as location, grantor, grantee, recording data, date, sale price, financing, units of comparison, lot dimensions, configuration and size, physical and topographical characteristics, zoning, utilities, and environmental influences.

Contractor's/Cost Method

• The contractor's/cost method is used for specialized properties with no comparisons, where the owner-occupied property has no rental and the plant and machinery are the important elements contributing to the value of the business.
• The market value is equated to reconstruction costs, and the valuer will assess the market value of the raw land and add to it the cost of rebuilding a new building, making subjective adjustments for obsolescence and depreciation.

Stepwise Regression Method

• Stepwise regression is a statistical technique used to select the most important independent variables for a regression model from a larger set of potential predictors.
• It helps identify the key factors that influence property value among a multitude of possible variables.
• The stepwise regression procedure involves forward selection, backward elimination, bidirectional elimination, model evaluation, interpretation, and prediction.

Advanced Valuation Methods

• Advanced valuation methods include:
  • Artificial Neural Networks (ANNs)
  • Hedonic Pricing Method
  • Spatial Analysis Methods
  • Fuzzy Logic
  • Autoregressive Integrated Moving Average (ARIMA)