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• The course is Economic Evaluation of Projects for AUIC A.A. 2024/2025
• The professor is Giulia Datola
• Today's topic is The market value from October 9, 2024
• The course aims to explain the definition of Market Value
• The course aims to explain what information is in an Evaluation Report
• The course explains how to appraise the Market Value

Market Value Definition

• European Valuation Standards (EVS) 9th Edition - 2020 and International Valuation Standards (IVS) are basic references
• Valuers must use the definition of Market Value aligning with the Capital Requirements Regulation.
• Market Value: The estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without being under compulsion
• Market Rent: The estimated amount for which the property should be leased on the valuation date between a willing lessor and a willing lessee based on an agreement and proper marketing without compulsion.
• Key elements of Market Value include the resulting value
• Key elements of Market Value include the real property being valued
• Key elements of Market Value include the particulars of the transaction
• Key elements of Market Value include the date of valuation
• Key elements of Market Value include the nature of the hypothetical parties as willing and competitive participants
• Key elements of Market Value include the consideration by the parties

The Valuation Report

• The result refers to a price in money, generally the local currency, for the property when parties act independently
• Market Value is measured as the most probable price reasonably obtainable in the market at the date of valuation
• The price is obtainable by both seller and buyer
• The estimate excludes inflated prices due to special financing terms
• Market Rent is the most probable rent reasonably obtainable at valuation date
• Market Rent is reasonably obtainable by the lessor and advantageous to the intending tenant
• The real property being valued includes the property itself with all legal, physical, economic, and other attributes to be analyzed
• Highest and best use (HABU) is integral to Market Value, requiring that the use of a property be physically possible, likely, legal, and also that results in the highest value at valuation date
• Regarding the transaction, valuations are estimated amounts, not predetermined sale prices.
• It's the price at which the market expects the transaction to be completed on the date of valuation
• For Market Rent, it is an estimated amount for the lease taken on the date of valuation
• Actual rent may differ if there were associated capital costs

Valuation Date

• Market Value or Rent is time-specific to a given date
• The standard valuation date differs from when the valuation is prepared
• The valuation amount reflects market conditions at the required valuation date
• The Valuation Report cannot predate the valuation date
• The definition assumes a simultaneous binding agreement without price variation
• Market Value isn't an assessment over the longer term but at the time of the transaction
• The "date of valuation" refers to the date on which the valuation is determined
• The completion of the Valuation Report cannot precede the date of valuation
• The hypothetical agreement of the transaction's terms is deemed to take place on the valuation date

The Hypothetical Parties

• Hypothetical parties are buyers and sellers that are willing and competitive
• A willing buyer is motivated, not compelled, and neither over-eager nor unwilling
• The same applies to Market Rent for a would-be tenant
• The buyer/tenant acts according to current market realities, not imaginary scenarios, and would not overpay
• The seller is a hypothetical seller, not an actual owner, who is neither over-eager nor unwilling
• A willing seller is motivated to sell at market terms for the best price obtainable after marketing

Conditions of valuation

• The assumed buyer and seller are hypothetical parties acting in current market conditions
• The requirement that they are both willing causes a tension which allows Market Value (or Market Rent) to be assessed
• Market Value and Market Rent are independent from the client's objectives of the valuation
• An arm's-length transaction excludes special relationships that may uncharacteristically inflate or deflate prices

Considerations

• Parties acting knowledgeably assumes they're well-informed about the property's nature & characteristics
• Parties acting knowledgeably assumes they know its potential uses, and the market state at valuation date
• Parties must appraise what is reasonably foreseeable
• Better-informed hypothetical buyers may exist
• Knowledge needed includes market and evidence to judge the value
• Parties act in their self-interest, seeking the best price for their positions in the transaction
• Assessment of prudence considers the market state at the valuation date with the best available market information
• No compulsion means each party is motivated to transact, but neither are forced or coerced
• Valuers may need to make assumptions in the absence of particular information
• Valuers must assume something they cannot reasonably ascertain
• Valuers undertake necessary inspections for professional valuation

Valuation Reporting

• The valuation is presented clearly in writing to a professional standard
• It must be transparent on instruction and intended use
• Effective communication is required to the client
• The Valuation Report is the document the client relies on for decisions and must be explicit
• The Valuation Report communicates the valuer's professional judgement of fair market value
• The report includes scope, assumptions, methods, and conclusions
• Provides a professional opinion of value supported by recognized standards
• Reports should be reliable and comprehensible for users and clients
• Reports should record assignment instructions, the valuation's basis and purpose, analysis results, and comparable details
• Reports must provide a clear and unequivocal opinion of value as of the valuation date

Key conditions of a valuation report

• Include sufficient detail to ensure all aspects of the report are agreed
• Reports must not be misleading or ambiguous, needing to be written understandably for someone without specific knowledge
• Reports must be objective, with opinions reasoned to enable understanding
• Conflicts of interest must be stated with measures taken to ensure objectivity.
• Valuations are prepared referencing a specific valuation date
• Values may change after that day
• Clients expect to rely on valuations for a period after the valuation date
• Valuers may state a period they should no longer be relied on, especially if values are volatile

Basic elements of the instruction should include

• The property: name, address, cadastre/land register reference and identification on a map
• The client's name and details, instructions, and any modifications since
• Third-party reliance where agreed
• Limitations on the report and any relative limitations to its publication
• The valuer's identification
• The valuer's qualifications and independence status
• Confirmation of valuer's necessary experience
• Confirmation there are no conflicts of interest

Valuation Work Scope

• The valuation work scope may include the valuation's purpose, the basis of value, the legal interest in the property being valued
• If applicable, a special assumption being made,
• Investigations carried out
• The avaliable information
• A list of documents and third-party information
• Information received and examined must include the source and the measurement standards used
• Important assumptions about unavailable information
• Reliance on information from the client and third parties must be recorded

Property Location should include

• neighborhood characteristics
• availability of transport
• identification of relevant geographical area
• the valuer's opinion of market characteristics

Property characteristics should include

• A Site analysis
• Description of the physical characteristics including built-in furniture and equipment
• Comment on the physical characteristics as to quality

Legal Situation Considerations

• Ownership and tenure, any covenants or obligations and any third party rights
• Tenacies information on main lease terms and any rent variation provisons
• Planning and development control of earthquake fire and flood risks
• Judgment of the impact of legal situation on value

Valuations steps

• Describe the approached that were considered and which were used
• Key assumptions need to be explained
• Selection criteria of comparables properties that are clearly stated
• Information regarding transactions of nearby properties
• The analysis of all Market Data, comparables, and all photographs
• Final calculation supporting opinion of Market Value

Conclusion must include

• The report stated clearly
• Confirmation of value
• The Valuation date
• Clear listing of costs VAT and fees
• The currency of the valuation
• Statement of GDPR + EVS compliance
• Basic disclaimer
• The Valuation Report must be signed and dated by the valuer

Market Value Appraisal Methods

• The sales comparison and cost approaches align with the economic principle of substitution for similar comparable values
• There are 3 conventional methods for determining the market value of real estate: the sales comparison approach, the cost approach, and the income approach
• Not every property's market value can be determined by all 3 approaches; usually, there will be a best method, but the other methods may narrow the range of the estimated market value
• The best method for appraising single family homes is the sales comparison approach
• The best method for appraising single family homes is the cost approach
• The cost approach is best to appraise special purpose buildings such as churches, schools and public buildings
• The income approach is best to estimate the market value of income properties such as office buildings, warehouses, apartment buildings and shopping centers
• Appraisers may use all three approaches in the event that adequate financial data on similar properties is not avaliable