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

2. Value theory Platon (427 – 347 BC) Aristoteles (384 – 322 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)

3. Value theory Karl Marx (1818 – 1883) Hernando de Soto (1940 - )
- 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)

4. Value theory
Background factors:
The Swedish Hand-book Fastighetsvärdering (Real Estate Valuation):
- Utility/Benefit - Scarcity - Need - Use/disposition rights - Transfer rights

5. Value theory - Utility/Benefit - Scarcity - Desire
Background factors: The Appraisal of Real Estate Part I, Chapter 2 page 19:
- Utility/Benefit
- Scarcity
- Desire
- Effective purchase power

6. Value theory
Background factors - a summary:
- Utility/Benefit Scarcity Desire/Need Effective purchase power Use/disposition rights Transfer rights

7. 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

8. Value Theory A consequence of: Depends on people’s desires
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

9. 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

10. Real property valuation
Literature:
Handouts
The Appraisal of Real Estate: Part 1 Fundamentals
Chapter 2 The Nature of Value (pages 19 – 31)

11. Relation between subjective yield value and market value
Seller
Buyer
Seller´s yield value
Buyer´s yield value
Area for presumptive transaction
Area hijau adalah besarnya estimasi nilai (pasar) yg mungkin terjadi di sebuah pasar properti tertentu. Sedangkan area di kanan dan kirinya masing-masing adalah keuntungan (yield) yang mungkin bisa didapatkan oleh pembeli dan penjual yg berinteraksi di pasar.

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

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

14. Definition of market value (2)
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”

15. 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!

16. 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

17. 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.

18. Income capitalisation approach (1)
SEK/
USD
Remaining
value
Yearly net
income 1 2 3
etc n
Year
The current value of future yearly
net income and remaining value at
the end of the calculation period

19. Income capitalisation approach (2)
4 methods:
Sales price / square meter
Sales price coefficient
Gross capitalisation factor
Net capitalisation percent

20. Information needed Information about the real property: Land use
Land area
Building: size, age, standard etc.
Yearly costs and incomes
Other special conditions

21. The cost approach Replacement costs 1 000
SEK/
USD
Replacement
costs
Depreciation 3.5 %/year
Cost
value
Cost of land
Age (years) 10
Replacement costs
Depreciation 10 years 3,5 %
Cost of land
Cost value

22. 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

23. Real property valuation
Notice - a frequent mistake !
Economics
Mathematics Statistics GIS
Land planning
Sociology
Common sense
Others

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