SWEDESURVEY Real property valuation Valuation is both a Science and an Art! Valuation Methods Valuation Theory Value Theory

SWEDESURVEY Value theory Platon (427 – 347 BC) - division of labour (specialization) contri- butes 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 dis- tinction between utility value and ex- change 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 ( ) - 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 Definition: The quantity of one thing (money) that can be obtained in exchange for another thing (property) The core of the value theory is: –Desire/Need –Utility/benefit –Scarcity –Purchasing power, using rights, transfer rights Number of properties Price Supply Demand Supply and demand

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 is both a Science and an Art! Valuation Methods Valuation Theory Value Theory

SWEDESURVEY Valuation theory Aristoteles ( BC) - subjective utility value Adam Smith ( ) - utility value, exchange value David Ricardo ( ) Thomas Malthus ( )

SWEDESURVEY Relation between subjective yield value and market value SellerBuyer Seller´s yield value Buyer´s yield value Area for presumptive transaction

SWEDESURVEY Valuation theory Classical scholars: -Smith -Ricardo -Malthus Their basic theory was a sort of “price theory” where they empha- sized the influence of production costs on the value but where the demand factor was supressed.

SWEDESURVEY Valuation theory The classical scholars could not suffi- ciently explain many valuation problems and the Neo-classical scholars appeared: Stanley Jevons ( ) Leon Walras ( ) Alfred Marshall ( ) Ernst Laur ( ) 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 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 Valuation Theory

SWEDESURVEY Valuation methods Price = Value = Cost (The Appraisal of Real Estate, 12 th edition, Chapter 2 page )

SWEDESURVEY Number of transfers Price Market value The most probable price of the property on the open market Definition of market value (1)

SWEDESURVEY Definition of market value (2) 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” Assdderq wrsdf r r w w wf w h tjh eyh h rth rt t er rtyr r rth dr Market value definition:

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 –Price –Date of sale –Seller –Buyer Information about the real property –Land use –Land area –Building: size, age, standard etc. –Other special conditions Seller: Mr Ek Buyer: Mrs Alm Date: Price: etc.

SWEDESURVEY Income capitalisation approach (1) SEK/ USD Year etc n Remaining value Yearly net income 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 Age (years) 010 Depreciation 3.5 %/year Replacement costs Replacement costs Depreciation 10 years 3,5 % Cost of land 200 Cost value 850 Cost of land Cost value

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 ! Mathematics Statistics GIS Economics Common sense Others Land planning Sociology

SWEDESURVEY Real property valuation Recommendation - a balanced and appetizing mix ! Mathematics Statistics GIS Economics Common sense Others Land planning Sociology