METHODS OF VALUATION

 INTRODUCTION

Thus valuation is the art and science of estimating the value of property at a particular point in time and for a particular purpose. Valuation is scientific in terms of purpose but an art in terms of its execution. Like an art, valuation keeps taking on new forms with the advancement in years and with the implication that the valuer must realized the need to break from his confinement and follow a path most suitable for the achievement of a realistic value opinion.

The valuation of real estate is much like mystery, and as such, requires vital clues which are
obtainable from appropriate data/information gathering methodology, unlike other markets; data are not easily available for processing into value estimates in a property market, therefore, it takes the valuer some reasonable mental effort to be able to wade through the maze of information provided by his client cum the field data personally obtained and his professional acumen to be able to appropriately and un-partially analyse those information/field data before arriving at his valuation opinion.

 Since the essential inputs of the valuers computations are affected by his own ability to research and analyse, there is the need for him to be very extensive in data collection in order to acquire a very strong and articulate background against which he will make his presentations.

Although, the aim of the valuer is to provide an estimate value, it should not be assumed that the valuer’s estimate of value and the market price or market value will be the same. Different valuers could well place different values on a particular interest at a particular time because they are making estimates and there is normally room for this difference in the individual valuer’s estimate but usually within certain reasonable limits. 

These limits depend on a lot of factors and it must be noted that in valuation, any uncertainty increases the risk element and this consequently reduces value estimates due to the peculiar nature of
properties. For this reason, the valuers were trained to make objective value judgments based on well analysed data collected on the field.

Thus, to make this judgment reliably, valuer need not only theoretical knowledge, intelligence, experience but also access to all necessary, reliable and representative information as well as the adoption of appropriate valuation methods. The real challenge of valuer is to minimize the zone of uncertainty around the open market value through representative data and adoption of reliable valuation methods.

OBJECTIVES

The objectives of this unit are:

1. Examine the methods of valuation 
2.  Appropriateness of each method for valuation. 

 Methods of valuation

Method of valuation can be defined as various calculations, computations or assessments which as experienced valuer adopts in arriving at his valuation opinion. Hence, methods of valuation vary and it is only a highly skilled valuer that can rightly adopt the appropriate method to satisfy the basis of value which he may have already identified.

Generally, there are five methods that can be adopted when carrying out a valuation exercise
and these approaches are:

1. Comparative method 
2. Investment method 
3. Contractors method 
4. Profit/account method 
5. Residual method 

The three basic traditional methods are: comparative, investment and contractors. Profit and residual are derivatives of the three basic methods.

Comparative method: 

this method is predicted on sales data. This tends to reflect what willing, knowledgeable and un-coerced sellers and buyers would agree upon as the price. This approach estimates market value by comparing sales prices of recent transactions involving similar properties. The comparable sales method postulate that the monetary value of an asset can be determined by comparison of that asset with other assets of similar nature which have been recently sold or exchanged in the same market or offered for sale in a similar market. ALSO, the essential conditions for estimating the value of real estate are knowledge of market forces, technical knowledge of the asset being appraised and knowledge of the purpose of the appraisal.

There are some factors called value indicators that determine variation in prices. For example
the number of toilet and bathrooms, provision of dining room, study, parking space etc. Before the valuer can apply this method the following conditions are crucial.

1. The comparable must be in the same neighbourhood. 
2. The comparable property transaction must similar e.g compare three bedrooms flat with three bedroom flat 
3. The transaction must be recent and sufficient enough for reliable judgment. 

In applying market data approach:

1. Seek out similar properties for which pertinent sales, rental data are available. 
2. Ascertain the nature and the conditions of sale to be sure it is at arms length. That is no motivating force, relationship etc 
3. Analyse the comparable properties important attributes with corresponding attributes of the property being appraised. 
4. Consider the dissimilarities in the characteristics disclosed in step b. in terms of their probable effects on sale’s price. 
5. Formulates an opinion in the light of the above analyses. 

Investment method: 

this is based on the income from the property and derives the value from the capitalization of such income. Capitalization has been defined as the process through which an anticipated income stream is converted into capital value. Since investment approach involves the capitalization of the net income after the deduction of the outgoings (e.g rates, repairs, management fees, insurance, rent to superior landlord or ground rent). It is applicable to property that generates income. It is obvious that only property which produces income or capable of producing income will permit the use of this approach. 

The investment method rest on the theory that the capital value of an interest in landed property, freehold or leasehold is directly related to the income or annual value of the property. It follows that given the rental income or rental value of a property, the capital value can be estimated. Annual value can readily be established from actual rental income or from comparison of rents of similar properties or occasionally by some other methods. However, there are challenges of valuing varying income with appropriate rate of capitalization and the effect of tax. The rate chosen should be reflective of the quantity, quality and the duration of the income stream and sufficient to attract capital to the particular class or type of real estate involved.