Transcript Land Valuation - Fastighetsvetenskap

Real property valuation
Valuation Methods
Valuation Theory
Value Theory
Valuation is both a
Science and an Art!
SWEDESURVEY
Value theory
Platon (427 – 347 BC)
- division of labour (specialization) contributes to higher efficiency
(The State)
Aristoteles (384 – 322 BC)
- on exchange, money, prices and value
(Politics and Ethics)
Adam Smith (1723 – 1790)
- distinction between Utility value and
Exchange value
(An inquiry into the nature and causes
of the wealth of nations, 1776)
SWEDESURVEY
Value theory
Karl Marx (1818 – 1883)
- connections to Aristoteles and the distinction between utility value and exchange value. The latter is a reflection of
the labour which is spent on the specific
commodity Marx claimed.
(Das Kapital, 1867, 1885, 1894)
Hernando de Soto (1940 - )
- on the causes to wealth differences in
the world and why capitalism triumphs
in the west but fails everywhere else.
(The Mystery of Capital, 2000)
SWEDESURVEY
Value theory
Background factors:
The Swedish Hand-book
Fastighetsvärdering (Real
Estate Valuation):
-
Utility/Benefit
Scarcity
Need
Use/disposition
rights
- Transfer rights
SWEDESURVEY
Value theory
Background factors:
The Appraisal of Real Estate
Part I, Chapter 2 page 19:
- Utility/Benefit
- Scarcity
- Desire
- Effective purchase
power
SWEDESURVEY
Value theory
Background factors - a summary:
-
Utility/Benefit
Scarcity
Desire/Need
Effective purchase
power
- Use/disposition
rights
- Transfer rights
SWEDESURVEY
Value theory
-
Utility/Benefit
Scarcity
Desire/Need
Effective purchase
power
- Use/disposition
rights
- Transfer rights
The first two factors are related to the
supply side of economy and human
behaviour, the two next to the demand
side of economy and human behaviour
SWEDESURVEY
Value Theory
• A consequence of:
– Valuation factors for real property
–
–
–
–
–
Social ideals and standards
Economic activities and trends
Government regulations and activities
Physical or environmental forces
Location factors
• Depends on people´s desires
• Depends on future benefits
• The value can not be calculated,
it can only be estimated
SWEDESURVEY
Real property valuation
Valuation is both a Science
and an Art!
Valuation includes components
and knowledge of:
-mathematics
-statistics
-physical (land) planning
-urban planning
-rural planning/agriculture
-building construction
-sociology/human behaviour
-common sense/feeling
SWEDESURVEY
Real property valuation
Literature:
- Handouts
- The Appraisal of Real Estate:
Part 1 Fundamentals
Chapter 2 The Nature of Value
(pages 19 – 31)
SWEDESURVEY
Real property valuation
Valuation Methods
Valuation Theory
Value Theory
Valuation is both a
Science and an Art!
SWEDESURVEY
Valuation theory
Aristoteles (322-284 BC)
- subjective utility value
Adam Smith (1723-1790)
- utility value, exchange value
David Ricardo (1772-1823)
Thomas Malthus (1766-1834)
SWEDESURVEY
Relation between subjective yield value
and market value
Seller
Buyer
Buyer´s
yield value
Area for presumptive transaction
Seller´s
yield value
SWEDESURVEY
Valuation theory
Classical scholars:
-Smith
-Ricardo
-Malthus
Their basic theory was a sort of
“price theory” where they emphasized the influence of production
costs on the value but where the
demand factor was supressed.
SWEDESURVEY
Valuation theory
The classical scholars could not sufficiently explain many valuation problems
and the Neo-classical
appeared:
scholars
Stanley Jevons (1835 - 1882)
Leon Walras (1834 - 1910)
Alfred Marshall (1842 - 1924)
Ernst Laur (1871 - 1964)
The most prominent feature of their ideas
were “The margin theory”
(Margin utility, margin cost and margin
income)
The demand component was important
for the value, not only the production cost
SWEDESURVEY
Valuation theory
Modern economists with
influence on value theory
and valuation theory are:
Frederic Babcock
(The Valuation of Real Estate, 1932)
Richard Ratcliff
(Modern Real Estate Valuation, Theory
and Application, 1968)
SWEDESURVEY
Valuation Theory
• Market value
– The most probable price of a
property on the open market
– Used in most cases
• Net income value
– The present value of future yearly
net income
– Used e.g. for
- investment decisions
- market simulation
• Cost value
– Replacement costs minus
depreciation
– Used e.g. for
- insurance compensation
- market simulation
SWEDESURVEY
Valuation methods
Price = Value = Cost
(The Appraisal of Real Estate, 12th
edition, Chapter 2 page 19 -20)
SWEDESURVEY
Definition of market
value (1)
Number
of
transfers
Price
Market value
The most probable price of the
property on the open market
SWEDESURVEY
Definition of market
value (2)
Assdderq
wrsdf r r
w w wf
w h tjh
eyh h rth
rt t er
rtyr r rth
dr
-
Market value definition:
Some key elements:
“ asset”
“ the estimated amount”
“ a property should exchange”
“ on date of valuation”
“ between a willing buyer”
“ a willing seller”
“ in an arm´s-length transaction”
“ after proper marketing”
“ wherein the parties had each
acted knowledgeably”
“ and without compulsion”
SWEDESURVEY
Valuation Methods
• Sales comparison approach
• Income capitalisation
approach
• Cost approach
When searching for a market value,
the income and cost methods are
market simulating methods!
SWEDESURVEY
Sales comparison
approach
• Identification and selection of real
properties purchased in a comparable
market area
• Objects are made comparable...
• ...and adjusted according to purchase
dates (price trends) or other
differencies
• Mean price of the selected purchases
= estimated market value
SWEDESURVEY
Information needed
• Information about the purchase
Seller: Mr Ek
– Price
Buyer: Mrs Alm
Date: 04-09-15
Price: 1 200 000
– Date of sale
etc.
– Seller
– Buyer
• Information about the real property
– Land use
– Land area
– Building: size, age, standard etc.
– Other special conditions
SWEDESURVEY
Income capitalisation
approach (1)
SEK/
USD
Remaining
value
Yearly net
income
0
1
2
3
etc . . . .
n
Year
The current value of future yearly
net income and remaining value at
the end of the calculation period
SWEDESURVEY
Income capitalisation
approach (2)
4 methods:
• Sales price / square meter
• Sales price coefficient
• Gross capitalisation factor
• Net capitalisation percent
SWEDESURVEY
Information needed
• Information about the real
property:
–
–
–
–
–
Land use
Land area
Building: size, age, standard etc.
Yearly costs and incomes
Other special conditions
SWEDESURVEY
The cost approach
SEK/
USD Replacement
costs
Depreciation 3.5 %/year
Cost of land
0
10
Replacement costs
Depreciation 10 years 3,5 %
Cost of land
Cost value
Cost
value
Age (years)
1 000
- 350
200
850
SWEDESURVEY
Information needed
• General information
– Average replacement costs
– Depreciation - time and percent
– Average value of land
• Information about the real property
– Land use
– Land area
– Building: size, age, standard etc.
– Other special conditions
SWEDESURVEY
Real property valuation
Notice - a frequent mistake
!
Economics
Mathematics
Statistics
GIS
Land
planning
Sociology
Common
sense
Others
SWEDESURVEY
Real property valuation
Recommendation - a balanced and
appetizing mix !
Economics
Mathematics
Statistics
GIS
Others
Land
planning
Sociology
Common
sense
SWEDESURVEY