Property Valuation Basics

Real Property Valuation - Objectives

• Understand the meaning of property valuation
• Identify the difference between Real Estate, Real Property and Personal Property
• Understand the Purpose of Valuation
• Identify the difference between Price, Cost and Value
• Identify the different types of value
• Describe the factors that influence value
• Describe the foundation/principles of valuation
• Understand the misconception of valuation

Real Property Valuation - Introduction

• Formal and informal appraisals are needed for complex societies
• Appraisals are categorized into market transactions and legal transactions
• Common market transactions needing valuations include purchase, finance/mortgage
• Legal transactions may include expropriation, compensation, taxation and use as evidence in lawsuits involving real property

Real Property Valuation - Meaning of Property Valuation

• Property valuation/appraisal is the act of developing an opinion of property value
• It involves research into market areas, assembling data, using analytical techniques, professional judgement and experience to develop a valuation opinion.
• It isn't simply a mathematical process, but more a forming of an opinion based on diverse factors, which also includes predicting the future

Real Property Valuation - Nature of Value

• Valuation is a mixture of art and science, with the scientific part involving data analysis and mathematical calculation
• The art aspect involves choosing relevant information for valuation judgments and forming opinions

Real Property Valuation - Real Estate, Real Property and Personal Property

• Real estate encompasses physical land and attached fixtures
• It is immobile and tangible
• Real estate includes things naturally part of the land (trees, minerals) and items attached by people (buildings, improvements)
• Real estate includes all attachments, both above and below ground
• Real property includes the rights, benefits and interests inherent in real estate ownership which can be separated and traded individually within a market
• Real estate appraisers distinguish between real estate, real property, and personal property and trade fixtures

Real Property Valuation - Personal Property

• Items that are not permanently attached to the real estate are personal property
• Examples include furniture, refrigerators, bookshelves which can be removed at lease termination
• Trade fixtures are personal property.

Real Property Valuation - Purpose of Valuation

• Valuation is the process of estimating the value of a property for a specific purpose
• Different purposes may lead to different property valuations
• Common purposes for valuation include transfer of ownership, financing and credit, litigation, tax matters, investment counseling

Real Property Valuation - Transfer of Ownership

• Valuation assists prospective buyers in setting offering prices and sellers in determining acceptable selling prices.
• It aids in establishing basis for property exchanges and reorganizations/mergers of property ownership

Real Property Valuation - Financing and Credit

• Valuation provides opinions of the value of security (property) for mortgage loans
• Investors use valuations to assess the value of mortgage bonds and also security in other financial investments.
• Valuation guides decisions related to insurance

Real Property Valuation - Litigation

• Valuation provides market value opinions for disputes involving property or real estate, or a portfolio of the same.
• Valuation also helps in estimating damage due to taking or division of property or real estate portfolios. It also estimates damages associated with environmental/contractual issues.

Real Property Valuation - Tax Matters

• Valuation informs assessed value for tax purposes and for certain tax obligations such as gift/inheritance taxes

Real Property Valuation - Investment Counseling

• Valuation aids in setting rent schedules, lease provisions, and feasibility studies for construction/renovation
• It assists in corporate mergers
• Valuation can provide an opinion of liquidation value for forced or auction sale of property

Real Property Valuation - Value and Type of Value

• Value relates to the price, market and cost
• Different valuations exist like market value, use value, an investor value and assessed value

Real Property Valuation - Market Value

• Market value is the probable value a specific property would sell at after being in open market for sufficient time.
• Buyers and sellers act prudently, knowledgeable and in self-interest without undue duress
• Defined as the most probable price for which the property should exchange in an open and competitive market
• This definition may vary between different groups

Real Property Valuation - Use-Value

• Use value is the value of a property in a specific use and does not depend on its highest and best use.
• Its value is based on the property's contribution to the enterprise.

Real Property Valuation - Investment Value

• The value of a property based on how it will satisfy the investor's requirement
• Investor's criteria must be known to accurately determine investment value

Real Property Valuation - Going-Concern Value

• The value of properties (tangible and intangible) acting as an on-going concern in an established business.
• Its value is determined by the incremental value of the property and associated business.

Real Property Valuation - Assessed Value

• Assessed value is the value of a property used for taxation and can be a percentage of or ratio to other valuations
• Assessed value might not be the same as market or similar values

Real Property Valuation - Factors that Create Value

• Four factors are essential to creating value:
  • Utility- property meets need/desire of occupants
  • Scarcity- limited supply of property in relation to demand
  • Desire- buyers' need for the property
  • Effective purchasing power- ability to acquire the property

Real Property Valuation - Forces that Influence Value

• Four forces influence a property's value
  • Social Forces (e.g. population demographics, household formations)
  • Economic Forces (e.g. employment, wages, industrial development)
  • Government Forces (e.g. regulations, policies, public services)
  • Physical/Environmental Forces (e.g. location, climatic conditions, and environment)

Real Property Valuation - Principles of Valuation

• Progression: A property's value may increase if similar properties in the same location are high quality.
• Regression: A property's value may decrease if similar properties in the same location are of poorer quality.
• Conformity: A property's value is likely to increase alongside similar properties in the neighborhood
• Substitution: Maximum value is limited by what it costs to build a similar property
• Change: Values are constantly affected by local economic/demographic trends, property condition, neighborhood characteristics and natural events.
• Contribution: Improvements to a property increase its value relative to the costs required for that improvement.
• Externalities: Factors outside of the property (like surrounding areas) can affect the property's value.

Real Property Valuation - Myths of Property Valuation

• Myth 1- A well-researched and well-done valuation is timeless
• Reality- Valuation is tied to market-wide information and changes with revealed information
• Myth 2 - A good valuation provides a precise estimate.
• Reality- Uncertainty exists in valuations, and realistic margin for error is essential when evaluating future economic conditions
• Myth 3 - Appraisal valuation changes on who it is valued for
• Reality - Appraisers remain objective, regardless of who they're valuing for
• Myth 4 - Market value equals replacement cost
• Reality - Market value is based on transactions, not cost to replace.
• Myth 5 - A property can be valued by its outward appearance
• Reality- Other elements like location, improvements, features, and amenities are also essential to property valuation
• Myth 6 - Appraisal and home inspection equal
• Reality - An appraisal and home inspection serve very different purposes.