MERGED EDS.pdf

 www.covenantuniversity.edu.ng Raising a new Generation of Leaders EDS522 ENGINEERING VALUATION- ASSIGNMENTS APRIL 2024 Prof A. N. Ede Dept of Civil Engineering Covenant University Ota Nigeria...

 www.covenantuniversity.edu.ng Raising a new Generation of Leaders EDS522 ENGINEERING VALUATION- ASSIGNMENTS APRIL 2024 Prof A. N. Ede Dept of Civil Engineering Covenant University Ota Nigeria ENGINEERING VALUATION - ASSIGNMENTS GROUPS: FORMED IN ALPHABETICAL ORDER AS IN YOUR ATTENDACE SHEETS CHE -3 GROUPS -1-2-3 GROUP: 1-20; 21-40; 41-60 CVE -3 GROUPS -1-2-3 GROUP: 1-30; 31-60; 61-93 CEN -3 GROUPS -1-2-3 GROUP: 1-25; 26-60, 61-80 EEE -4 GROUPS -1-2-3-4 GROUP: 1-25; 26-50; 51-75; 76-94 1CE -3 GROUPS -1-2-3 GROUP: 1-25; 26-50; 51-78 MCE -4 GROUPS -1-2-3-4 GROUP: 1-25; 26-50; 51-75; 76- PET -2 GROUPS -1-2 GROUP: 1-33; 34-66 2 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - ASSIGNMENTS 1. Write a report on various valuation methods (as indicated for your group) minimum 2 pages: Traditional valuation methods:. 1. comparable method;.CHE-1, CVE-1, PET-1 2. investment/income method;.CHE-2, CVE-2 3. profit method;.CHE-3,CVE-3 4. development/residual method; MCE-1, PET-2,. 5. contractor's method/cost method; MCE-2. 6. multiple regression method; and MCE-3. 7. stepwise regression method MCE-4. 3 www.covenantuniversity.edu.ng  ENGINEERING VALUATION- ASSIGNMENTS 1. Write a report on various valuation methods (as indicated for your group) minimum 2 pages: Advanced valuation methods:. artificial neural networks (ANNs);CEN-1, EEE-1, ICE-1 hedonic pricing method; CEN-2,EEE-2, ICE-2 spatial analysis methods;. EEE-3 fuzzy logic; and. CEN-3 autoregressive integrated moving average (ARIMA). EEE-4, ICE-3 4 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -ASSIGNMENTS 2. Prepare a valuation reports (with practical implications to your area of study and based on your group). Real property valuation. CVE, MCE, Personal property valuation. CEN, EIE, ICE Oil and Gas valuation. PET Mines and quarries valuation CHE SUBMISSION (questions 1 and 2): LATEST APRIL 19, 2024 NB: Consult various publications: books, journals etc. Citations and references to follow APA format. Plagiarism/AI check will be applied. Presentation of all group works on APRIL 22, 2024 5 www.covenantuniversity.edu.ng  www.covenantuniversity.edu.ng Raising a new Generation of Leaders REAL ESTATE Valuation Methods Prof A. N. Ede Dept of Civil Engineering Covenant University Ota Nigeria 2023-2024 Session  COST ENGINEERING -INTRODUCTION Course Code: EDS522 Course Title: Engineering Valuation Semester/session: Omega 2023/2024 Time: Two (2) hours Contact Time Course Instructors: Engr. Prof. Anthony N.Ede Engr. Dr. Abimbola O.Odetoyan Mr. Adeyemi, G Engr. Olumuyiwa Onakunle 2 www.covenantuniversity.edu.ng  ENGINEERING VALUATION Objectives of valuation work/ valuer's primary duty and responsibility. In a Society which not only permits but encourages the private ownership of productive property and one which also engages in large and multitudinous public works, there appears, on every hand, a necessity for the valuation of property. In fact, property valuations are used throughout the economic, governmental, legal, and social activities of such a society. 3 www.covenantuniversity.edu.ng ENGINEERING VALUATION - Objectives of valuation work Various classes of property: real, personal, tangible, and intangible, natural resources, public utilities, investment securities, and so forth. 4 www.covenantuniversity.edu.ng ENGINEERING VALUATION - Objectives of valuation work The word “property” is now given to physical things and also to the legal rights of ownership of tangible entities. 5 www.covenantuniversity.edu.ng ENGINEERING VALUATION - Objectives of valuation work Valuation is now considered to encompass three classes of operations, namely: The estimation of the cost of producing or replacing physical property, 2) The forecasting of the monetary earning power of certain classes of property, (3) The valuation or determination of the worth of property. 6 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - Objectives of valuation work Because of the specialized knowledge and abilities required of the valuer which are not possessed by the layman, there has now come to be established a fiduciary relationship between him and those who rely upon his findings. 7 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Real property is defined as all the interests, benefits, rights and encumbrances inherent in the ownership of physical real estate, where real estate is the land together with all improvements that are permanently affixed to it and all appurtenances associated thereto. 8 www.covenantuniversity.edu.ng ENGINEERING VALUATION - REAL ESTATE The valuation of real estate is therefore required to provide a quantitative measure of the benefit and liabilities accruing from the ownership of the real estate. 9 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Valuations are required, and often carried out, by several different players in the marketplace. These may include real estate agents;. appraisers; assessors;. mortgage lenders;. brokers;. property developers... 10 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Valuations are required, and often carried out, by several different players in the marketplace. investors and fund managers;. lenders;. market researchers and analysts;. shopping centre owners and operators; and. other specialists and consultants. 11 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Review the various methods used in real estate valuation. The role of valuation For any valuation to have validity it must produce an accurate estimate of the market price of the property. The model should therefore reflect the market culture and conditions at the time of the valuation. 12 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE The role of valuation It should be remembered that the model should be a representation of the underlying fundamentals of the market. Thus, in the property market, what is often called a ``valuation'' is the best estimate of the trading price of the building. 13 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE The role of valuation In this context, the following convention is adopted:. price is the actual exchange price in the marketplace. 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. 14 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE The role of valuation In many property markets it is commonplace for the ownership of property to be separate from its use. Often the price of exchange will be the same whether the purchaser has investment or occupation in mind, but nonetheless the view of the two groups of bidders will be different. 15 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE The role of valuation An investor will view worth as the discounted value of the rental stream produced by the asset, whereas the owner-occupier will 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. No doubt both groups of bidders will also be mindful of its potential resale price to a purchaser from the other group. 16 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE The role of valuation 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. Here most transactions are based on owner- occupiers' views of the worth of the properties. the contribution it will make to business profit, swell as subjective issues such as status and feelings of security. 17 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE The role of valuation Valuers, with hardly any transaction evidence, can only attempt to replicate these calculations of worth in arriving at an estimate of exchange price. One of the paramount concerns of the valuation profession is the need to ensure that information presented to a client is clear and unambiguous. 18 www.covenantuniversity.edu.ng ENGINEERING VALUATION - REAL ESTATE The role of valuation Not only should all parties understand the terminology used, it is also important that the client receives all other information that might be required to make a rational financial or investment decision. The latter point does not only concern the semantics of definitions of exchange price, but must also address the issue of valuation methodology. 19 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE The role of valuation Given that clients are themselves becoming more sophisticated in the way they determine whether to buy or sell property, then the pricing model used to assess the most likely exchange price should reflect their thought processes. This requires the valuer to better understand the client's requirements and leads to the adoption of more advanced valuation models which can reflect the increased level of data and information available. 20 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Market value A definition of value is an attempt to clarify the assumptions made in estimating the exchange price of a property if it were to be sold in the open market. These assumptions can include the nature of the legal interest, the physical condition of the building, the nature and timing of the market, and assumptions about possible purchasers in that market. 21 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Market value Given that a compelling reason for using market value definitions is to ensure consistency in the process of valuation, it is important that there is a consistency of definition in all countries. 22 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Market value For this reason, the International Valuation Standards Committee (IVSC) has set a ``standard'' to provide a common definition of market value. Market value is a representation of value in exchange, or the amount a property would bring if offered for sale in the open market at the date of valuation under circumstances that meet the requirements of the market value definition. 23 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Market value. In order to estimate market value, a valuer must first estimate the highest and best use, or most probable use. That use may be a continuation of a property’s existing use or some alternative. These determinations are made from market evidence. 24 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Market value. Market value is estimated through the application of valuation methods and procedures that reflect the nature of property and the circumstances under which the given property would most likely trade in the open market. 25 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Market value Market value is defined for the purpose of the standards as follows: Market value is the estimated amount for which an asset 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 compulsion. 26 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods Each country will have a different culture and experience, which will determine the methods adopted for any particular valuation. The majority of all methods will rely upon some form of comparison to assess market value. 27 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods This may be done, in its simplest form, by direct capital comparison or may rely upon a of observations that allow the valuer to determine a regression model. Any such method is referred to as ``traditional''. 28 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods Other models or methods try to analyse the market by directly mimicking the thought processes of the players in the market in an attempt to estimate the point of exchange. These models tend to be more quantitative in method and will be referred to as ``advanced''. 29 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods For each method (or approach) that is adopted, its theory is briefly explained together with an outline of how it is applied in the valuation process. The appropriate economic principles are also quoted with an explanation of how they apply to each method. 30 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods Methods can be grouped as follows: 1.Traditional valuation methods:..Comparable method;. Investment/income method;. Profit method;. Development/residual method;. Contractor's method/cost method;. Multiple regression method; and. Stepwise regression method. 31 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods 2 Advanced valuation methods:. Artificial neural networks (ANNs);. Hedonic pricing method;. Spatial analysis methods;. Fuzzy logic; and. Autoregressive integrated moving average (ARIMA). 32 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Comparable method Sales comparison is the most widely used approach. The value of the property being appraised (called the subject property) is assumed to relate closely to the selling prices of similar properties within the same market area. The appraiser first selects several similar properties (comparables or simply comps) from among all the properties that have recently been sold. 33 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Comparable method Since no two properties are identical the appraiser must adjust the selling price of each comparable to account for differences between the subject and the comparable, i.e. differences in size, age, quality of construction, selling date, surrounding neighbourhood, etc. The appraiser infers the current value of the subject from the adjusted sales prices of the comparables. 34 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Comparable method The sales comparison approach is heavily dependent on the availability, accuracy, completeness, and timeliness of sale transaction data. Information provideded by sources include government records, data vendor and the appraiser's network of local contacts (e.g. brokers participating in transactions) 35 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Comparable method Comparable sales analysis procedure may be viewed as a four-part process: (1) For a given subject property, finding the most comparable sales. (2) Adjusting the selling prices of the comparables to match the characteristics of the subject. (3) Using the several estimates of value to arrive at an estimate of market value. 36 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Comparable method (4) Presenting the results in a report format suitable for viewing or printing. The process of finding comparables utilizes ``distance'' to establish a measure of comparability between the subject and the comparable under consideration. It is computed by weighting the differences in characteristics between the subject and the comparable. The distance, D is calculated as follows: 37 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Comparable method The distance, D is calculated as follows 38 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Comparable method 39 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods -Comparable method Given the several comparable sales, several adjusted selling prices are obtained. A weighted estimate is formed as follows: 40 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Comparable method For each comparable property the sales price is adjusted to the subject property as follows: Market value of the subject property. = Selling price of the comparable property- Adjustments for differences between the subject and the comparables 41 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Comparable method Market value of the subject property = Selling price of the comparable property-Adjustments for differences between the subject and the comparables 42 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods -Comparable method Thus the weighted estimate of value places more emphasis on properties, which are most like (smaller distances) the subject property and have the smaller adjustments to the selling price. The comparables with the lowest distance are selected. In calculating the distance the variables are allocated a factor weight.. 43 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods -Comparable method The weighting is used to balance the effect of variables according to the magnitude of the variable itself, so that a variable with larger numerical size has a smaller weight. This process of computing several comparable sales estimates of value, a weighted estimate of value and an MRA (multi regression analysis) estimate of value yields estimates of value. 44 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods -Investment/income capitalization method At its simplest level, the comparable model can be used to determine capital value directly. However, moving from sub-markets where there is a high degree of similarity (for example, residential markets), the way in which comparison can be utilized needs to be modified. In the investment market, for example, direct capital comparison is rarely appropriate because the degree of heterogeneity is much higher. 45 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods -Investment/income capitalization method As such, the comparison needs to be broken down further to look at rental (on a pro-rata basis) and the initial yield achieved on sale. This distinction between the rental and the yield reflects an interesting interaction between two sub-markets, the occupational market and the investment market. At its simplest level, property can either be owned and occupied by the same party (owner-occupied), or the owner can choose to pass the right of occupation to a third party by letting the property. 46 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods -Investment/income capitalization method The tenant will then pay the owner (the landlord) a rent to represent the (normal) annual value of the property to the tenant. The level of rent is determined by the supply of, and demand for, that type of property in the market. The rent also represents the return or interest on the money invested in the property by the owner. 47 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods -Investment/income capitalization method It is the remuneration for the giving up of the use of the property. This rental income is simply a cash flow and as such the value of the rented property may be determined by the present value of the predicted cash flow. Similarly, it is possible to determine a gross rent multiplier by analyzing other previous sales. 48 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods -Investment/income capitalization method Investors can be determined to be paying ``x'' times the rent for a particular type of property. The higher the multiplier the higher the market value, and this in turn reflects the greater attractiveness of the subject property. 49 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods -Investment/income capitalization method Thus, valuers decapitalize recent comparable sales and apply the derived multiplier to the rent of the subject property. The investment method is a method of simple comparison. It does not attempt to analyze the worth of the property investment from first principles. 50 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Profits method In the section above, the investment method is shown to be a method where valuation methodology has moved away from modelling the thought processes of the players in the market, and instead assesses the market value of a subject property by reference to observed recent transactions of similar properties in the same area. 51 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Profits method However, if there are insufficient sales to determine a comparable value and if there is no rent produced because the property is in owner-occupation, then the valuer must determine the value by returning to a detailed market analysis. 52 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Profits method For instance, the market value of a hotel in owner- occupation will be dependent on the potential cash flow to be derived from ownership. That cash flow will be determined by the number of bedrooms in the hotel, the room rate and the average occupancy rate for the year. In other words, property is simply viewed as a unit of production and it is the valuer's role to assess the economic rent for the property from first principles. 53 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Profits method This is calculated by assessing the potential revenue to be expected each year from the hotel, and deducting all other costs of a prudent hotelier in realizing that cash flow. These costs will include direct costs such as catering, laundry and service. In addition, allowances will need to be made for the remuneration of the hotelier, interest on money borrowed to run the hotel and a return on capital for any equity tied up in the business. Having calculated the liabilities these are deducted from the revenue figure and the residue will be an estimation of the economic rent for the property. 54 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Profits method The capital value can then be derived by multiplying the annual rent by an appropriate multiplier. This process reverts to a fundamental analysis of the worth of the property to the business. The economic rent is a derivative of the supply and demand for the final product, in this example, the hotel rooms.. 55 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Development/residual method The properties under estimation are plots or sites that can be developed. The best method for estimating site value is through comparable vacant land sales. The sales should be reduced to appropriate units of comparison. 56 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Development/residual method The value of the land or site should be estimated as if the site were vacant and available for its highest and best use. Each comparable sale should be described. As a minimum, the description must include the following data:.. 57 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Development/residual method As a minimum, the description must include the following data: location; grantor; grantee; recording data; date; 58 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Development/residual method sale price; financing; units of comparison; lot dimensions; configuration and size; physical and topographical characteristics; zoning, utilities; and environmental influences. 59 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Development/residual method This analysis of understanding the market value of the land and property to the business can be extended to include the valuation of development property. If one views the process of (re)development as a business, it is possible to assess the market value of land and buildings in their existing form as part of that process. 60 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Development/residual method Development occurs where the current use of land and buildings is not the highest and best. By spending money redeveloping the site, it is possible to release latent value, as the market value of the land is increased due to the demand for the new use commanding a higher price than the previous use.. 61 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Development/residual method By viewing development in this way, it can be seen that the residual method of valuation is very similar to the profits method. With the residual method, the valuer assesses the market value of the land in a redeveloped form (either by comparison or by the investment method) and deducts from this gross development value all costs that will be incurred in putting the property into the form that will command that price. 62 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditionalvaluation methods Development/residual method These costs will include demolition of the existing building (if not already a cleared site), infrastructure works, construction costs, professional fees, finance costs and a remuneration for undertaking the risk of development (developer’s profit). By deducting these liabilities from the final market value, a residue is produced. 63 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditionalvaluation methods Development/residual method This residue represents the maximum capital expenditure for buying the land. It will therefore include all costs of purchase (taxation, legal fees, professional fees and finance). The net residual land value is determined by allowing for these additional land costs. 64 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditionalvaluation methods Development/residual method It can be seen therefore that the residual land value is, as with any economic rent, dependent upon the supply and demand of the finished product, the developed property. The greater the demand for the finished property, the higher the gross development value and if costs remain relatively static, the higher the market value of the land in its original state. 65 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Contractor's/cost method A further way in which it is possible to estimate the market value of land and property is the contractor's method or the replacement cost method. If the property being valued is so specialized that properties of that nature are rarely be sold on the open market, it will be effectively impossible to assess its value by reference to comparable sales of similar properties. Similarly, if there is no rental produced, the investment method will also be inappropriate. 66 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Contractor's/cost method The profits method could be applied if the property is intrinsically linked to the business carried out in the property, however, where that business is one of production (rather than service) it is difficult to determine the contribution of the property to the overall usage. The plant and machinery contained within are likely to have a greater value to the business than the structure containing them. Thus, once again, the valuer must revert to understanding the thought process of the user of the building. 67 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Contractor's/cost method This can be illustrated by reference to a property such as an oil refinery. Here the nature of the business is so specialised that there are no comparisons, the property would be owner-occupied so there is no rental and the plant and the machinery will be the important elements contributing to the value of the business. Thus, the owner of the building will simply assess the market value of the building by reference to its replacement cost. How much would it cost to replace the property, if the business were deprived of its use? 68 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Contractor's/cost method In simple terms, market value will equate to reconstruction costs. The valuer will assess the market value of the raw land (by reference to comparable land values in an appropriate alternative use), add to this value the cost of rebuilding a new building which could perform the function of the existing structure, and from this then make subjective adjustments to allow for the obsolescence and depreciation of the existing building relative to the new hypothetical unit. It is reasonable to assume that this mirrors the thought process of the owner-occupier and thus should be viewed as a valid and rational method of valuation. 69 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Contractor's/cost method It is interesting that in countries where property investment is less prevalent and where owner-occupation is the favoured method of property utilisation, then it is not only specialised properties which are valued by the contractor's method. If there is no investment market (i.e. properties will only exchange between owner-occupiers in the market) then the price of exchange will reflect the ``bottom line'' cost to the purchaser. 70 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Contractor's/cost method This bottom line will be the cost that will need to be incurred for a new building relative to the existing property that is on the market. There will be a strong correlation between price and cost. However, if the occupation market is dominated by companies renting, and there is a degree of scarcity in the market, then price will be determined not by cost, but by the supply and demand characteristics of the occupational market. In such a case, regardless of the nature of the property, the investment method will dominate as the favoured valuation model. 71 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Multiple regression method Multiple regression analysis is a statistical technique used in real estate valuation to estimate the relationship between the value of a property (dependent variable) and various factors or attributes (independent variables) that influence its value. This method is particularly useful when there are multiple variables affecting property value and when those variables interact with each other in complex ways. 72 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Multiple regression method Regression Analysis for Real Estate Valuation provides a more scientific approach to property valuation by using historical transaction data. Here’s how it works: ‒Dependent Variable: The sales price of the property. ‒Predictors (Independent Variables): Factors such as square footage, lot size, age of the property, and other relevant features. 73 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Multiple regression method The multiple regression model can be expressed as: 74 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Multiple regression method ‒Benefits: Offers a robust model based on past transactions. Provides better guidance on property valuations. Reduces reliance on intuition and subjective judgment 75 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Stepwise regression method Stepwise regression is a method which can be used to help sort out the relevant explanatory variables from a set of candidate explanatory variables when the number of explanatory variables is too large to allow all possible regression models to be computed. One of the main kinds of stepwise regression in use today is called ``stepwise forward-with- a-backward-look regression'' and is explained below:. 76 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods 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. In the context of real estate valuation, stepwise regression can help identify the key factors that influence property value among a multitude of possible variables. 77 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Stepwise regression method Stepwise Regression Procedure: Forward Selection Backward Elimination Bidirectional Elimination Model Evaluation Interpretation Prediction 78 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Stepwise regression method Benefits: Objective Selection: Stepwise regression reduces reliance on intuition and subjectivity. Data-Driven Insights: By analyzing past transactions, it provides better guidance on property valuations. Efficient Model Building: It automates the process of predictor inclusion or exclusion. 79 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE 2 Advanced valuation methods: Artificial Neural Networks (ANNs); Hedonic Pricing Method; Spatial Analysis Methods; Fuzzy Logic; and Autoregressive Integrated Moving Average (ARIMA). 80 www.covenantuniversity.edu.ng  ENGINEERING VALUATION - REAL ESTATE Methods-Traditional valuation methods Stepwise regression method 81 www.covenantuniversity.edu.ng  www.covenantuniversity.edu.ng Raising a new Generation of Leaders REAL ESTATE Advanced Valuation Methods Prof A. N. Ede Dept of Civil Engineering Covenant University Ota Nigeria 2023-2024 Session  ENGINEERING VALUATION - REAL ESTATE Methods 2 Advanced valuation methods:. Artificial neural networks (ANNs);. Hedonic pricing method;. Spatial analysis methods;. Fuzzy logic; and. Autoregressive integrated moving average (ARIMA). Artificial Neural Networks (ANNs) Artificial Neural Networks (ANNs) serve as a powerful valuation method across various domains, including finance and real estate. ANNs are a type of machine learning algorithm inspired by the structure and function of the human brain. They consist of interconnected nodes, or neurons, organized into layers. These networks excel at modeling intricate non-linear relationships, making them particularly valuable in data-rich environments where traditional valuation methods may fall short. Artificial Neural Networks (ANNs) Artificial Neural Networks (ANNs) Artificial Neural Networks (ANNs) ANNs can be used as a valuation method in several ways: 1.Predictive Modeling 2.Pattern Recognition 3.Risk Assessment 4.Sentiment Analysis 5.Portfolio Optimization 6.Market Microstructure Analysis Artificial Neural Networks (ANNs) Predictive Modeling: ANNs can be trained on historical financial data to predict future cash flows, revenues, or other financial metrics relevant to valuation. By learning patterns and relationships from past data, ANNs can provide forecasts that inform valuation models. Artificial Neural Networks (ANNs) Pattern Recognition: ANNs can identify complex patterns and nonlinear relationships in data that traditional valuation methods might overlook. This ability can be particularly valuable when valuing companies with unique business models or in industries with rapidly changing dynamics. Artificial Neural Networks (ANNs) Risk Assessment: ANNs can help assess and quantify various types of risks that affect valuation, such as market risk, credit risk, or operational risk. By analyzing large datasets and identifying risk factors, ANNs can improve the accuracy of risk- adjusted valuation models. Artificial Neural Networks (ANNs) Sentiment Analysis: ANNs can analyze textual data from sources like news articles, social media, or earnings call transcripts to gauge market sentiment and investor perceptions. Sentiment analysis can provide valuable insights into market expectations and potential future performance, influencing valuation estimates. Artificial Neural Networks (ANNs) Portfolio Optimization: In addition to valuing individual assets or companies, ANNs can be used in portfolio optimization to construct diversified portfolios that maximize returns while minimizing risk. By considering factors like correlations, volatilities, and expected returns, ANNs can help investors make informed asset allocation decisions. Artificial Neural Networks (ANNs) Market Microstructure Analysis: ANNs can analyze market microstructure data, such as order book dynamics, trade execution patterns, or price movements, to gain insights into market efficiency, liquidity, and price discovery mechanisms. These insights can inform valuation models and trading strategies. Artificial Neural Networks (ANNs) Applying Artificial Neural Networks (ANNs) to property valuation involves using machine learning techniques to analyze data and predict the value of a specific property based on its attributes. Here's a step-by-step guide on how to apply ANN to property valuation: Artificial Neural Networks (ANNs) Step-by-step guide on how to apply ANN to property valuation: Data Collection; Data Preprocessing Building the ANN Model: Split Data- Divide your dataset into training and testing sets, Model Training, Model Evaluation Predictions; Validation and Sensitivity Analysis Iterate and Refine; Interpretation and Decision Making Artificial Neural Networks (ANNs) Data Collection Gather a dataset of properties similar to the one you want to value. Include attributes such as size, number of bedrooms and bathrooms, location, amenities, age of the property, and any other relevant features. Additionally, ensure that your dataset includes the sale prices or values of these properties. Artificial Neural Networks (ANNs) Data Preprocessing Clean and preprocess the data to ensure it is ready for analysis. This may involve handling missing values, encoding categorical variables, and scaling numerical features to a similar range. Artificial Neural Networks (ANNs) Building the ANN Model: Split Data- Divide your dataset into training and testing sets. The training set will be used to train the ANN model, while the testing set will be used to evaluate its performance. Model Training: Model Evaluation: Artificial Neural Networks (ANNs) Building the ANN Model: Model Training: Build and train an ANN model using the training data. Design the architecture of the neural network, including the number of layers, the number of neurons in each layer, and the activation functions. Train the model using algorithms such as backpropagation and optimization techniques like stochastic gradient descent. Artificial Neural Networks (ANNs) Building the ANN Model: Model Evaluation: Evaluate the performance of the trained ANN model using the testing data. Common evaluation metrics for regression tasks include mean squared error (MSE), root mean squared error (RMSE), and coefficient of determination (R-squared). Ensure that the model generalizes well to unseen data and does not overfit or underfit. Artificial Neural Networks (ANNs) Predictions: Once the model is trained and evaluated, use it to predict the value of the specific property you're interested in or any other relevant outcome (e.g., rent, price). Input the property's attributes into the trained ANN model, and the model will output an estimated value based on its learned patterns from the training data. Artificial Neural Networks (ANNs) Validation and Sensitivity Analysis Validate the predicted value against known market values or appraisals for similar properties. Additionally, perform sensitivity analysis to understand how changes in input variables affect the predicted property value Calculate metrics such as mean squared error (MSE), mean absolute error (MAE), or R-squared to assess prediction accuracy. Artificial Neural Networks (ANNs) Iterate and Refine If the model’s performance is not satisfactory, iterate on the model by adjusting its architecture, hyperparameters, or by collecting more relevant data as to improve its accuracy and robustness. Artificial Neural Networks (ANNs) Interpretation and Decision Making Interpret the predicted property value in the context of market conditions, comparable sales, and other relevant factors. Use the estimated value to inform decision- making processes such as buying, selling, or investing in real estate. Artificial Neural Networks (ANNs) Artificial Neural Networks (ANNs) Artificial Neural Networks (ANNs) Artificial Neural Networks (ANNs) Artificial Neural Networks (ANNs) Artificial Neural Networks (ANNs) Artificial Neural Networks provide a dynamic and adaptable approach to company valuation, bridging the gap left by traditional methods. It's important to note that while ANNs offer several advantages, they also have limitations and challenges, such as the need for large amounts of data, potential overfitting, and the "black box" nature of some models. Therefore, ANNs are often used in conjunction with traditional valuation methods and human judgment to enhance decision- making processes. Additionally, thorough validation and testing are crucial to ensure the reliability and robustness of ANN-based valuation models. Hedonic Pricing Method The Hedonic Pricing Method is a powerful model used to estimate the economic value of goods or assets by dissecting them into their individual characteristics. It is a valuation technique commonly used to estimate the economic value of goods or assets with multiple characteristics. It decomposes the price of a product into its constituent attributes, allowing analysts to assess the implicit value of each attribute. This method is widely applied in real estate, environmental economics, and consumer goods markets. Hedonic Pricing Method How It Works: oThe hedonic pricing model estimates the extent to which each factor affects the market price of the property. oBy controlling for non-environmental factors (keeping them steady), any remaining price discrepancies represent differences in the good’s external surroundings. oThe model relies on actual market prices and comprehensive, available data sets. Hedonic Pricing Method How It Works: 1. Identify Attributes: Analysts begin by identifying the relevant attributes that influence the price of the product or asset being evaluated. For example, in real estate, attributes may include location, size, number of bedrooms, proximity to amenities, and so on. Hedonic Pricing Method How It Works: 2. Gather Data: Data on the prices and characteristics of the products or assets under consideration are collected. This data can come from various sources, including sales records, market surveys, or listings. Hedonic Pricing Method How It Works: 3. Regression Analysis: Using statistical regression analysis, the relationship between the price and the attributes is estimated. The regression model quantifies how changes in each attribute affect the price. For example, it may reveal that an additional bedroom adds a certain dollar amount to the property's price. Hedonic Pricing Method 3. Regression Analysis: The equation might look like this: Hedonic Pricing Method How It Works: 4. Attribute Valuation: Once the regression model is established, the implicit value of each attribute can be determined. This allows for the isolation of the contribution of each attribute to the overall price of the product or asset. Hedonic Pricing Method How It Works: 5. Price Estimation: With the estimated implicit values of each attribute, analysts can then predict the price of similar products or assets based on their characteristics. This can be useful for various purposes, such as pricing new products, assessing the value of improvements, or comparing the value of different properties. Hedonic Pricing Method Advantages and Disadvantages: o The model relies on actual market prices and comprehensive, available data sets. o Advantages: Value Estimation: It provides concrete estimates based on actual choices, especially when applied to property markets with accurate data. Flexibility: The method can be adapted to relationships among other market goods and external factors. Hedonic Pricing Method Advantages and Disadvantages: o Disadvantages:  Perceived Environmental Differences:  It captures consumers’ willingness to pay for perceived environmental differences and their consequences. Hedonic Pricing Method The Hedonic Pricing Method is valuable because it accounts for the heterogeneity of products and assets in the market and allows for the valuation of intangible attributes that may not have explicit market prices. Hedonic Pricing Method However, it relies heavily on the availability and accuracy of data, as well as the appropriateness of the regression model used. Additionally, interpretation of the results requires careful consideration of potential biases and confounding factors. Spatial Analysis Methods Spatial analysis methods can be valuable for property valuation, especially when considering the spatial relationships and geographical context of real estate assets. Here's how spatial analysis methods can be applied as a valuation method: Spatial Analysis Methods How it can be applied as a valuation method: 1. Geographic Information Systems (GIS): 2. Spatial Regression Analysis: 3. Geographically Weighted Regression (GWR): Spatial Analysis Methods How it can be applied as a valuation method: 4. Spatial Hedonic Pricing Models: 5. Spatial Interpolation: 6. Land Use and Land Cover Analysis: 7. Spatial Econometric Models: Spatial Analysis Methods How you can apply spatial analysis to a specific property: 1.Problem Formulation: o Clearly define the problem you want to address. o For instance, you might want to assess the suitability of a location for a new housing development. Spatial Analysis Methods How you can apply spatial analysis to a specific property: 2. Data Gathering: o Collect relevant data about the property and its surroundings. o This includes both internal features (e.g., property size, condition) and external factors (e.g., neighborhood safety, proximity to amenities). Spatial Analysis Methods How you can apply spatial analysis to a specific property: 3. Exploratory Spatial Data Analysis (ESDA): o Visualize your data using maps and graphs. Identify spatial patterns, clusters, and outliers. o Explore relationships between variables (e.g., property value and distance to schools). Spatial Analysis Methods How you can apply spatial analysis to a specific property: 4. Spatial Autocorrelation: o Assess whether nearby properties exhibit similar values. o Use metrics like Moran’s I to measure spatial dependence. Spatial Analysis Methods How you can apply spatial analysis to a specific property: 5. Spatial Clustering: o Identify clusters of similar properties. Techniques like k-means clustering or DBSCAN can help. o Determine if certain neighborhoods have distinct characteristics. 6 Spatial Analysis Methods How you can apply spatial analysis to a specific property: 6. Geographically Weighted Regression (GWR): o Model the relationship between property value and predictors (e.g., size, amenities) while accounting for spatial variation. o GWR allows coefficients to vary across space. Spatial Analysis Methods How it can be applied as a valuation method: 7. Spatial Econometrics: o Apply econometric techniques to spatial data. o Consider spatial lag models or spatial error models. o These models account for spatial spillover effects. Spatial Analysis Methods How it can be applied as a valuation method: 8. Interpret Results: o Analyze the output from your spatial models. o Understand how spatial factors impact property value. o Consider both statistical significance and practical significance. Spatial Analysis Methods How it can be applied as a valuation method: 9. Software Tools: o Leverage Geographic Information Systems (GIS) software (e.g., ArcGIS, QGIS) for spatial analysis. o Use Python libraries (e.g., GeoPandas, PySAL) for scripting and modeling. Spatial Analysis Methods By applying spatial analysis techniques to a specific property, you can gain: a deeper understanding of its value drivers and make more informed decisions about its valuation, development potential, and market positioning. Fuzzy logic Fuzzy logic is a mathematical framework for dealing with uncertainty and imprecision in decision-making. Fuzzy logic While it's not commonly used as a standalone valuation method in real estate, it can be incorporated into valuation models to account for: subjective judgments, qualitative factors, and uncertain inputs. Fuzzy logic Fuzzy Logic is a form of many-valued logic that extends beyond traditional binary (true/false) logic. o In fuzzy logic, truth values can be any real number between 0 and 1, representing degrees of truth or membership. Fuzzy logic Fuzzy Logic deals with imprecise or uncertain information, allowing for more nuanced decision-making. o Unlike traditional binary logic, which is rigid (true/false), fuzzy logic accommodates shades of truth. Fuzzy logic Fuzzy Logic deals with imprecise or uncertain information, allowing for more nuanced decision-making. o Unlike traditional binary logic, which is rigid (true/false), fuzzy logic accommodates shades of truth. Fuzzy logic 1.Steps to Implement Fuzzy Logic in Property Valuation: a. Identify Relevant Factors: o List the relevant factors affecting property value (e.g., size, condition, location, amenities). o Recognize that some factors are hard to quantify precisely. Fuzzy logic 1. Steps to Implement Fuzzy Logic in Property Valuation: b. Linguistic Variables and Membership Functions: o Define linguistic variables (e.g., “good,” “average,” “poor”) for each factor. o Create membership functions that map input values to degrees of membership in these linguistic terms. o For example, if assessing property condition, membership functions could be “excellent,” “fair,” and “deteriorated.” Fuzzy logic 1.Steps to Implement Fuzzy Logic in Property Valuation: c. Fuzzy Rules: o Formulate rules based on expert knowledge or data. o Example rule: “If property size is large and location is excellent, then value is high.” Fuzzy logic Steps to Implement Fuzzy Logic in Property Valuation: d. Fuzzy Inference System: o Combine rules using fuzzy logic operators (AND, OR, NOT). o Calculate the overall degree of membership for each linguistic term. Fuzzy logic Steps to Implement Fuzzy Logic in Property Valuation: e. Defuzzification: o Convert fuzzy output into a crisp value (e.g., property value in dollars). o Methods include centroid, mean of maximum, or weighted average. Fuzzy logic Steps to Implement Fuzzy Logic in Property Valuation: f. Comparison with Deterministic Approach: o Compare results obtained using fuzzy logic with those from a deterministic approach (using crisp numbers). Assess how well fuzzy logic captures uncertainty and imprecision. Fuzzy logic Example Case Study: o Consider the purchase of an office building. o Apply fuzzy logic to evaluate factors like location, condition, and amenities. o Obtain a fuzzy valuation result that reflects the inherent uncertainty. Fuzzy logic Software and Tools: oUse specialized software or programming languages (e.g., Python with fuzzy logic libraries) to implement fuzzy logic. Fuzzy logic Benefits: o Fuzzy logic allows us to model complex, uncertain relationships. o Handles less quantifiable data effectively. o It captures nuances that binary logic cannot represent. Fuzzy logic By implementing fuzzy logic in property valuation, you can capture the qualitative aspects, uncertainty, and imprecision inherent in real estate appraisal and decision-making processes. Fuzzy logic Fuzzy logic provides a flexible and intuitive framework for incorporating expert knowledge, linguistic variables, and subjective judgments into property valuation models. Autoregressive Integrated Moving Average (ARIMA) o Autoregressive Integrated Moving Average (ARIMA) is a statistical analysis model used for both understanding time series data and predicting future trends. o While it's not typically used as a standalone valuation method in real estate, it can be applied to predict future property values based on historical sales data. Autoregressive Integrated Moving Average (ARIMA) 1. Components of ARIMA: o Autoregression (AR):  Predicts a changing variable based on its own lagged (prior) values.  For instance, it might predict stock prices based on historical performance. Autoregressive Integrated Moving Average (ARIMA) 1. Components of ARIMA: o Integrated (I):  Represents differencing raw observations to achieve stationarity (replacing data values with differences from previous values). o Moving Average (MA):  Considers the dependency between an observation and a residual error from a moving average model applied to lagged observations. Autoregressive Integrated Moving Average (ARIMA) Steps for applying ARIMA: 1. Data Processing: o Start by collecting historical data related to property prices. o You can obtain this data from real estate databases, websites, or local agencies. o Transform the raw data into a time series format, with the timestamp (usually months or years) as the index. o For example: Autoregressive Integrated Moving Average (ARIMA) Steps for applying ARIMA: 2. Data Exploration and Visualization: o Explore the time series visually to identify trends, seasonality, and any underlying patterns. o Use techniques like seasonal decomposition, autocorrelation function (ACF), and partial autocorrelation function (PACF) plots. o Remove any periods (e.g., housing market crashes) that might distort the analysis. Autoregressive Integrated Moving Average (ARIMA) Steps for applying ARIMA: 3.Stationarity: oARIMA assumes that the time series is stationary (constant statistical properties over time). oCheck for stationarity using statistical tests or visual inspection. oIf not stationary, apply differencing (integration) to make it stationary. Autoregressive Integrated Moving Average (ARIMA) Steps for applying ARIMA: 4. Identify ARIMA Parameters: o ARIMA models have three parameters: (p), (d), and (q):  (p): Order of the autoregressive (AR) component (number of lag observations).  (d): Degree of differencing (order of integration).  (q): Order of the moving average (MA) component. o Use ACF and PACF plots to estimate these parameters. Autoregressive Integrated Moving Average (ARIMA) Steps for applying ARIMA: 5. Build the ARIMA Model: oFit the ARIMA model to your training data. oFor example, in Python: Autoregressive Integrated Moving Average (ARIMA) Steps for applying ARIMA: Autoregressive Integrated Moving Average (ARIMA) Steps for applying ARIMA: 6. Validation and Forecasting: o Split your data into training and test sets. o Validate the model’s performance using metrics like Mean Absolute Error (MAE) or Mean Squared Error (MSE). o Forecast future property prices using the trained ARIMA model. Autoregressive Integrated Moving Average (ARIMA) Steps for applying ARIMA: 6. Validation and Forecasting: o Split your data into training and test sets. o Validate the model’s performance using metrics like Mean Absolute Error (MAE) or Mean Squared Error (MSE). o Forecast future property prices using the trained ARIMA model. Autoregressive Integrated Moving Average (ARIMA) Steps for applying ARIMA: 7. Fine-Tuning and Interpretation: oAdjust the model parameters if needed. oInterpret the results, including residual plots and confidence intervals. Autoregressive Integrated Moving Average (ARIMA) Steps for applying ARIMA: 7. Fine-Tuning and Interpretation: oAdjust the model parameters if needed. oInterpret the results, including residual plots and confidence intervals. Autoregressive Integrated Moving Average (ARIMA) Advantages and Limitations: o Advantages:  Effective for time series forecasting.  Captures autocorrelation and seasonality. o Limitations:  Assumes the future resembles the past (may fail during financial crises or rapid technological changes). Autoregressive Integrated Moving Average (ARIMA) By applying ARIMA specifically to property valuation, you can leverage historical sales data and time series forecasting techniques to predict future property values, informing investment decisions and property valuation assessments. Autoregressive Integrated Moving Average (ARIMA) While ARIMA modeling can provide valuable insights into the future trajectory of property values, it's essential to recognize its limitations and the uncertainties inherent in real estate markets. Autoregressive Integrated Moving Average (ARIMA) Consider using ARIMA forecasts as one input among others in the valuation process, and supplement quantitative analysis with qualitative assessments and expert judgment for a more holistic approach to property valuation.  www.covenantuniversity.edu.ng Raising a new Generation of Leaders EDS522 - Engineering Valuation INTRODUCTION Prof A. N. Ede Dept of Civil Engineering Covenant University Ota Nigeria  ENGINEERING VALUATION -INTRODUCTION Course Code: EDS522 Course Title: Engineering Valuation Semester/session: Omega 2022/2023 Time: Two (2) hours Contact Time Course Instructors: Engr. Prof. Anthony N.Ede Engr. Dr. Gideon O. Bamigboye Mr. Adeyemi, G Engr. Abimbola O.Odetoyan Engr. Ezenkwa Chidiebere 2 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Overview of Course Description Objectives of valuation work/ valuer's primary duty and responsibility. Valuer's obligation to his or her client, to other valuers, and to the society. Valuation methods and practices. Valuation reports. Expert witnessing. Ethics in valuation. Valuation standards. Price, cost and value. Depreciation and obsolescence. Valuation terminology. Appraisal reporting and review. Real property valuation. Personal property valuation. Machinery and equipment valuation. Oil and gas valuation. 3 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Objectives The objectives of the course are to: i. understand the responsibilities and duties of a valuer. ii. Know valuation terminologies. iii. know the valuer’s obligations to his or her client. iv. know the valuer’s obligations to other valuers and the society. v. know valuation methods and practices. vi. know how to write valuation reports. vii. understand valuation appraisal report and writing methods. 4 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Objectives The objectives of the course are to: viii. understand the concept of real property valuation. ix. understand the concept of personal property valuation. x. understand the concept of machinery and equipment valuation. xi. understand the concept of oil and gas valuation. xii. understand the concept of mines and quarries valuation. xiii. know valuation standards. xiv. understand depreciation and obsolescence. xv. understand price, cost and value. xvi. Understand ethics in valuation. 5 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Learning Outcomes On completion of the course, students should be able to: i.explain the responsibilities and duties of a valuer. ii. explain valuation terminologies. iii. enumerate valuer’s obligations to his or her client. iv. enumerate valuer’s obligations to other valuers and the society. v. explain valuation methods and practices. vi. explain the steps involved in writing valuation reports. vii. carry out valuation appraisal. viii. carry out valuation of real properties. 6 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Learning Outcomes On completion of the course, students should be able to: ix. carry out valuation personal properties. x. carry out valuation of machineries and equipment. xi. carry out valuation of oil and gas. xii. carry out valuation of mines and quarries. xiii. describe valuation standards. xiv. calculate depreciation and obsolescence. xv. calculate price, cost, and value. xvi. explain ethics in valuation. xvii. explain expert witnessing in valuation. 7 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Modules and Details of Topics Module 1- Objectives of valuation work/ valuer's primary duty and responsibility. Valuer's obligation to his or her client, to other valuers, and to the society. Valuation methods and practices. Valuation reports. Real property valuation. Personal property valuation. Week 1 to 4 + Test 1-Week 5 Prof. Ede, A. N. (C) PROF Engr. Odetoyan, A. LII Engr. Ezenkwa Chidiebere AL Module 2- Expert witnessing. Ethics in valuation. Valuation standards. Price, cost and value. Depreciation and obsolescence. Valuation terminology. Appraisal reporting and review. Machinery and equipment valuation. Oil and gas valuation. Mines and quarries valuation. Week 6 to 9 + Test 2-Week 10 Dr. Bamigboye, G. O. SL Mr. Adeyemi, G. LII Module 3- Presentation of group projects (Highlighted topics) Week 11 to 14 -All Lecturers - We are going to group the students. 8 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Objectives of valuation work/ valuer's primary duty and responsibility. In a Society which not only permits but encourages the private ownership of productive property and one which also engages in large and multitudinous public works, there appears, on every hand, a necessity for the valuation of property. In fact, property valuations are used throughout the economic, governmental, legal, and social activities of such a society. 9 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Objectives of valuation work/ valuer's primary duty and responsibility. As the vocation of property valuation has developed during past decades from a business occupation into a profession, certain concepts have emerged and become clear. The word “property” is now given to physical things and also to the legal rights of ownership of tangible entities. Valuation is now considered to encompass three classes of operations, namely: 10 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Objectives of valuation work/ valuer's primary duty and responsibility. Valuation is now considered to encompass three classes of operations, namely: The estimation of the cost of producing or replacing physical property, 2) The forecasting of the monetary earning power of certain classes of property, (3) The valuation or determination of the worth of property. 11 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Objectives of valuation work/ valuer's primary duty and responsibility. Because of the specialized knowledge and abilities required of the valuer which are not possessed by the layman, there has now come to be established a fiduciary relationship between him and those who rely upon his findings. 12 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION The Institute of Appraisers & Cost Engineers (a Division of NSE) occupies a unique position among professional valuation societies in that it recognizes and is concerned with various classes of property: real, personal, tangible, and intangible, natural resources, public utilities, investment securities, and so forth. It is also unique in that it recognizes the threefold character of the valuation function. 13 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION In recognizing the need for the highest professional competence among valuers, The Institute of Appraisers & Cost Engineers (a Division of NSE) actively supports scholastic programs which are designed to provide the necessary academic background to both valuer aspirants and to the qualified professional who desire to update and broaden their professional skills. The necessity for a set of authoritative principles and code of ethics, broad enough to cover all classes of property as well as the complexities of the various valuation procedures, is a pressing one. 14 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION To meet the need for a comprehensive set of guideposts and for a specific code of ethics, the IA & CE (a Division of NSE) has amended, adopted The Principles of Appraisal Practice and Code of Ethics of the American Society of Appraisers. 15 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Definition of "Valuation Practice" and "Property" The term valuation practice, as defined by the Institute, applies to any of the four following operations, singly or in combination, these operations being executed within a framework of general principles of technical procedure and personal conduct: (1) Determination of the value of property (the transitive verb determine having meaning: “to come to a decision concerning, as the result of investigation, reasoning, etc”); (2) Forecasting of the earning power of property; 16 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Definition of "Valuation Practice" and "Property" (3) Estimation of the cost of (a) Production of a new property (production having the meaning: brought into being by assembly of elements, fabrication, construction, manufacture, or natural growth of living things”) (b) Replacement of an existing property by purchase or production of an equivalent property (c) Reproduction of an existing property by purchase or production of an identical property. 17 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Definition of "Valuation Practice" and "Property" (4) Determining non-monetary benefits or characteristics that contribute to value. The rendering of judgments as to age, remaining life, condition, quality, or authenticity of physical property, amenities; an estimate of the amount of a natural resource, population increase, nature of market, rate of absorption, etc 18 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Definition of "Valuation Practice" and "Property" In a valuation and in a forecast of earning power, the word property is used to describe the rights to the future benefits of something owned or possessed to the exclusion of other persons. The “something owned” may be tangible, intangible or both. In a cost estimation, the word property is used to describe the “something owned” without regard to its ownership. 19 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION OBJECTIVES OF VALUATION WORK Various Kinds of Objectives of Valuation Work A valuation is undertaken for one or more of several objectives, namely: to determine the value of a property; to estimate the cost of producing, acquiring, altering, or completing a property; 20 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION OBJECTIVES OF VALUATION WORK Various Kinds of Objectives of Valuation Work to estimate the monetary amount of damages to a property; and to forecast the monetary earning power of a property. In specific instances, the work may have additional objectives, such as: the formulation of conclusions and recommendations or the presentations of alternatives and their consequences) for the client’s actions. 21 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Objective Character of the Result of Valuation Undertaking The primary objective of a monetary valuation is determination of a numerical result, either as a range or most probable point magnitude- the Naira amount of a value, the Naira amount of an estimated cost, the Naira amount of an earning power. 22 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Objective Character of the Result of Valuation Undertaking This numerical result is objective and unrelated to the desires, wishes, or needs of the client who engages the valuer to perform the work. The amount of this figure is as independent of what someone desires it to be. All the principles of valuation ethics stem from this central fact. 23 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUER’S PRIMARY DUTY AND RESPONSIBILITY The valuer’s duty and responsibility, in each subject case, is two fold. Valuer’s Obligation to Determine and Describe the Apposite Kind of Value or Estimated Cost First, because there are several kinds of value and several kinds of cost estimates, each of which has a legitimate place as the end point of some class of valuation engagemnt, it is the valuer’s obligation to ascertain which one of these is pertinent to the particular undertaking. 24 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUER’S PRIMARY DUTY AND RESPONSIBILITY The valuer’s duty and responsibility, in each subject case, is two fold. Valuer’s Obligation to Determine and Describe the Apposite Kind of Value or Estimated Cost In meeting this obligation, the valuer may consider his client’s instructions and/or may obtain legal or other professional advice, but the selection of the apposite kind of value or estimated cost is the valuer’s sole responsibility. 25 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUER’S PRIMARY DUTY AND RESPONSIBILITY The valuer’s duty and responsibility, in each subject case, is two fold. Valuer’s Obligation to Determine and Describe the Apposite Kind of Value or Estimated Cost Also, it is his obligation, in this connection, fully to explain and describe what is meant by the particular value or cost estimate which he has determined, in order to obviate misunderstanding and to prevent unwitting or deliberate misapplication. 26 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUER’S PRIMARY DUTY AND RESPONSIBILITY The valuer’s duty and responsibility, in each subject case, is two fold. Valuer’s Obligation to Determine and Describe the Apposite Kind of Value or Estimated Cost For example, a valuation engagement which calls for the determination of the current market value of a multi-tenant office building leasehold estate, would not be properly discharged by a determination of the depreciated new cost of replacement of the improvements. 27 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Valuer’s Obligation to Determine Numerical Results with Whatever Degree of Accuracy the Particular Objectives of the Valuation Necessitate Second, it is the Valuer’s obligation to determine the appropriate and applicable numerical results with as high a degree of accuracy as the particular objectives of the valuation necessitate. 28 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Valuer’s Obligation to Avoid Giving a False Numerical Result Obviously, the valuer has every obligation to avoid giving false figure. The numerical result of a valuation could be false for one of two reasons: it could be false because it is a grossly inaccurate estimate of the apposite kind of value or cost estimate, or it could be false, even though numerically accurate, because it is an estimate of an inapposite kind of value of cost estimate. 29 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Valuer’s Obligation to Attain Competency and to Practice Ethically In order to meet his obligations, the valuer must be competent in his field. This competency he attains by education, training, study, practice, and experience. He must also recognize, understand, and abide by those ethical principles that are interwoven with and are an essential part of truly professional practice. 30 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Professional Character of Valuation Practice The members of the Institute are engaged in a professional activity. A profession is based on an organized body of specific knowledge – knowledge not possessed by laymen. It is of such a character that it requires a high degree of intelligence and considerable expenditure of time and effort to acquire it and to become adept in its application. 31 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Professional Character of Valuation Practice A valuer’s client relies on the valuer’s professional knowledge and abilities to whatever extent may be necessary to accomplish the objectives of the work. Members of the Institute recognize this relationship. 32 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Valuer’s Responsibility to Third Parties Under certain specific circumstances a valuation report may be given by a client to a third party for their use. If the purpose of the valuation includes a specific use by a third party, the third party has a right to rely on the validity and objectivity of the valuer’s findings as regards the specific stated purpose and intended use for which the appraisal was originally made. 33 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Valuer’s Responsibility to Third Parties Members of the Institute recognize their responsibility to those parties, other than the client, who may be specifically entitled to make use of their reports. 34 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUER’S OBLIGATION TO HIS CLIENT The valuer’s primary obligation to his client is to reach complete, accurate, and pertinent conclusions and numerical results regardless of the client’s wishes or instructions in this regard. The relationship between client and valuer is not one of principal and agent. 35 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUER’S OBLIGATION TO HIS CLIENT However, the valuer’s obligation to his client go somewhat beyond this primary obligation. These secondary obligations are set forth in the following sections. 36 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Confidential Character of a Valuation Engagement The fact that a valuer has been employed to make a valuation is a confidential matter. In some instances, the very fact of employment may be information that a client, whether private or public agency, prefers for valid reasons to keep confidential. Knowledge by outsiders of the fact of employment of a valuer may jeopardize a client’s proposed enterprise or transaction. 37 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Confidential Character of a Valuation Engagement Consequently, it is improper for the valuer to disclose the fact of his engagement, unless the client approves of the disclosure or clearly has no interest in keeping the fact of the engagement confidential, or unless the appraiser is required by due process of law to disclose the fact of his engagement. 38 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Confidential Character of a Valuation Engagement In the absence of an express agreement to the contrary, the identifiable contents of a valuation report are the property of the valuer’s client or employer and, ethically, cannot be submitted to any professional society as evidence of professional qualifications, and cannot be published in any identifiable form without the client’s or employer’s consent. 39 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Valuer Obligation to Give Competent Service It is not proper for a valuer to accept an engagement to make a valuation of property of a type he is not qualified to value or in a field outside his Institute membership classification, unless: (a) he fully acquaints the client with the limitations of his qualifications or (b) he associates himself with another valuer or valuers who possess the required qualifications. 40 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Valuer Obligation to Give Competent Service As a corollary to the above principle, the Institute declares that it is unethical for a valuer to claim or imply that he has professional qualifications which he does not possess or to state his qualifications in a form which may be subject to erroneous interpretation 41 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Valuer’s Obligation Relative to Giving Testimony When a valuer is engaged by one of the parties in a controversy, it is unethical for the valuer to suppress any fact, data, or opinions which are adverse to the case his client is trying to establish; or to over- emphasize any facts, data, or opinions which are favorable to his client’s case; or in any other particulars to become an advocate. 42 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Valuer’s Obligation to Document Appraisal Testimony When a member accepts employment to make a valuation or to testify as to value of property before a court of law or other judicial or quasi-judicial forums, the valuer shall, before testifying, complete an adequate written valuation report, or have complete documentation and substantiation available in his files. 43 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Valuer’s Obligation Relative to Serving more Than one Client in the Same Matter When two or more potential clients seek a valuer’s services with respect to the same property or with respect to the same legal action, the valuer may not properly serve more than one, except with the consent of all parties. 44 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION Agreements and Contracts for Valuation Services It is good practice to have a written contract, or at least a Letter of intent, between valuer and client, covering objectives and scope of work, time of delivery of report and amount of fees. In certain circumstances, it may be desirable to include in the valuation service contract a statement covering the objective character of valuation findings and a statement that the valuer cannot act as an advocate or negotiator 45 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUER’S OBLIGATION TO OTHER VALUERS AND TO THE DIVISION Protection of Professional Reputation of Other Valuers The valuer has an obligation to protect the professional reputation of all valuers (whether members of the Institute or not) who subscribe to and practice in accord with the Principles of Valuation Practice of the Institute. The Institute declares that it is unethical for a valuer to injure, or attempt to injure by false or malicious statements or by innuendo the professional reputation or prospects of any valuer. 46 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUER’S OBLIGATION TO OTHER VALUERS AND TO THE DIVISION Valuer Obligation Relative to Institute’s Disciplinary Actions A member of the Institute, having knowledge of an act by another member which, in his opinion, is in violation of the ethical principles incorporated in the Principles of Valuation Practice and Code of Ethics of the Institute, has the obligation to report the matter in accordance with the procedure specified in the Constitution and Bylaws. It is the valuer’s obligation to cooperate with the Institute and its officer in all matters, including investigation censure, discipline, or dismissal of members who are charged with violation of the Principles of Valuation Practice and Code of Ethics of the Institute. 47 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUATION METHODS AND PRACTICES Various Kinds of Value The Institute recognizes that different kinds of property may have different kinds of value depending on the particular attendant circumstances and, further, that there are both basic and subordinate kinds of value. Good professional practice requires that the valuer describe in sufficient detail, in each case, the nature and meaning of the specific value that he is determining. 48 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUATION METHODS AND PRACTICES Selection of Valuation Method The procedure and method for determining the particular value in question is a matter for the valuer himself to determine-he cannot be held responsible for the result unless he has a free hand in selecting the process by which that result is to be obtained. However, good valuation practice requires that the method selected be adequate for the purpose, embrace consideration of all the factors that have a bearing on the value, and be presented in a clear and logical manner 49 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUATION METHODS AND PRACTICES Fractional Valuations Certain classes of properties (real estate, business enterprise, collections of chattels, for example) can be considered as made up of components (for example, in case of real estate: land, buildings, machinery and equipment, contracts, and goodwill). If an element is considered as an integrated part of the whole property, its value, in general, is different from the value the same element has if considered as a fraction separated from the whole property. 50 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUATION METHODS AND PRACTICES Fractional Valuations -A valuation of an element of a whole property considered by itself and ignoring its relation to the rest of the whole property, is called a “fractional valuation.” There are legitimate uses for fractional valuations (valuation of buildings for fire insurance purposes; valuation in connection with public utility rate-making, etc.) but good practice requires that a fractional valuation be labeled as such and that the limitations on its use by the client and/ or third parties be clearly stated. 51 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUATION METHODS AND PRACTICES Contingent and Limiting Conditions Affecting a Valuation In many instances the validity of the valuer’s conclusions as to the value of a subject property is contingent upon the validity of statements, information, and/or data upon which he has relied, supplied to him by members of other professions or secured by him from official sources. Such material may be obtained, for example, from architect, engineers, lawyers, accountants, government officials, government agencies, etc. 52 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUATION METHODS AND PRACTICES Contingent and Limiting Conditions Affecting a Valuation It is proper for the valuer to rely upon and use such material provided: (1) he states in his report that he has done so, (2) he stands ready to make his sources and/or the material itself available for any required verification, and (3) he does not pass to others the responsibility for matters that are, or should be, within the scope of his own professional knowledge. 53 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUATION METHODS AND PRACTICES Contingent and Limiting Conditions Affecting a Valuation Good valuation practice requires that the valuer state any other contingent or limiting conditions which affect the valuation, such as, for example, that the value is contingent upon the completion of projected public or private improvements, etc 54 www.covenantuniversity.edu.ng  ENGINEERING VALUATION -INTRODUCTION VALUATION METHODS AND PRACTICES Hypothetical V