LET’S TALK ABOUT VALUE
Understanding Value and the Variables Attached to Immovable Property
When discussing the value of immovable property, it is important to recognise that “value” is not necessarily the same as the price at which a property may ultimately be sold. The conclusion reached will depend on a number of variables, including the purpose of the assessment, the market conditions, the methodology applied, the property characteristics, the valuation date, and the professional authority of the person expressing the opinion.
For purposes of real estate, it is useful to distinguish between:
(a) A market analysis undertaken in the interests of real estate and the property market; and
(b) A formal valuation undertaken by a registered professional, having regard to the purpose, methodology, authority and legal standing of the valuation.
A. MARKET ANALYSIS BY A PROPERTY PRACTITIONER
A market analysis is commonly referred to as a Comparative Market Analysis (CMA) or a market-related assessment.
It is generally prepared by a property practitioner or estate agent based on their knowledge and understanding of the local property market, together with available information relating to comparable properties.
The practitioner will typically consider factors such as:
• Comparable properties;
• Location;
• Size and accommodation;
• Condition of the property;
• Improvements and amenities;
• Current competing properties;
• Supply and demand;
• Recent market activity; and
• Prevailing market trends.
The purpose is generally to assist a property owner in determining an appropriate marketing or asking price, or to provide an indication of how the property may be positioned within the current market.
A property practitioner's market opinion can therefore be extremely useful in a real estate transaction, particularly where the objective is to understand current buyer behaviour, competing properties and prevailing market conditions.
However, a market analysis should not automatically be regarded as equivalent to a formal statutory or professional valuation.
An ordinary CMA does not necessarily follow the same formal valuation methodology, reporting requirements or professional standards applicable to a registered professional valuation.
In simple terms:
A CMA is primarily a market-based opinion intended to assist with a real estate transaction, whereas a formal valuation is a professional opinion of value prepared for a defined purpose and on a specified basis of valuation.
B. VALUATION BY A REGISTERED PROFESSIONAL
A formal property valuation is a professional opinion of value supported by an appropriate valuation methodology, relevant market evidence, analysis and motivation.
Depending on the circumstances and applicable legal requirements, the valuation would be undertaken by an appropriately registered professional valuer or, where applicable, an appropriately appointed person with the necessary authority to perform the valuation.
The valuation should be undertaken in accordance with the applicable legislation, professional requirements and recognised valuation standards relevant to the particular assignment.
The conclusion of value is determined with reference to matters such as:
• The specific purpose of the valuation;
• The applicable basis of valuation;
• The valuation date;
• The nature and characteristics of the property;
• The interest or rights being valued;
• Relevant market evidence;
• Appropriate valuation methodology;
• Assumptions and limiting conditions; and
• The circumstances and requirements of the client or instructing authority.
A formal valuation may be required for a variety of purposes, including, depending on the circumstances:
• Property financing and lending;
• Taxation;
• Deceased estates;
• Matrimonial or divorce matters;
• Legal proceedings;
• Financial and accounting purposes;
• Municipal purposes;
• Insurance;
• Liquidation;
• Commercial purposes;
• Leasehold interests;
• Replacement value; and
• Other statutory, institutional or professional requirements.
The purpose of the valuation is particularly important, because the appropriate basis and methodology may differ depending on the question that the valuer has been instructed to answer.
PURPOSE, METHODOLOGY AND AUTHORITY
The distinction between a market analysis and a formal valuation can therefore be understood through three fundamental considerations:
1. Purpose
Why is the opinion of value required?
A property being valued for sale, financing, taxation, litigation, insurance or estate administration may require different considerations and, depending on the circumstances, a different basis of value.
2. Methodology
How was the conclusion reached?
A professional valuation should be supported by an appropriate methodology and relevant market evidence. Depending on the property and assignment, this may include comparable sales, income-based approaches, cost-based approaches or other appropriate valuation techniques.
3. Authority and Legal Standing
Who is expressing the opinion, and under what authority?
The professional status, registration, appointment and scope of authority of the person undertaking the valuation are important considerations, particularly where the valuation is required for a statutory, legal, financial or other formal purpose.
THE IMPORTANCE OF THE VALUATION REPORT
A formal valuation report will ordinarily identify and explain the key elements upon which the conclusion of value is based.
These may include:
• Identification of the property;
• The property interest being valued;
• The valuation date;
• The purpose of the valuation;
• The basis of valuation;
• Relevant assumptions and conditions;
• The methodology adopted;
• Market evidence and comparable information;
• Analysis and professional reasoning; and
• The concluded value.
This provides the reader with a clear understanding of what has been valued, why it has been valued, how the conclusion was reached, and the circumstances in which that conclusion should be relied upon.
CONCLUSION
The important point is that value is not simply a number.
The number represents the conclusion of an analysis undertaken within a particular framework.
Accordingly, when considering the value of immovable property, it is important to ask:
- What is being valued?
- What interest in the property is being valued?
- For what purpose?
- As at what date?
- On what basis of value?
- Using what methodology and market evidence?
- And who has the authority and professional standing to express that opinion?
A property practitioner's market analysis and a registered professional valuation can therefore both have an important place in the property industry, but they serve different purposes and should not automatically be treated as interchangeable.
The market analysis assists us in understanding what the market may support, while the professional valuation provides a structured and professionally supported opinion of value for a defined purpose and basis of valuation.
