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BE 4418-02 - Concept of "Value"

This document discusses the concept of value as it relates to real property valuation. It provides background on value theory from political science and economics. It defines market value as the most probable price a property would sell for on the open market between a willing buyer and seller. The core factors that influence value are identified as desire/need, utility/benefit, scarcity, and purchasing power. Common approaches to estimating market value are described, including the sales comparison approach, income capitalization approach, and cost approach. Information requirements for each approach are also outlined.

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27 views34 pages

BE 4418-02 - Concept of "Value"

This document discusses the concept of value as it relates to real property valuation. It provides background on value theory from political science and economics. It defines market value as the most probable price a property would sell for on the open market between a willing buyer and seller. The core factors that influence value are identified as desire/need, utility/benefit, scarcity, and purchasing power. Common approaches to estimating market value are described, including the sales comparison approach, income capitalization approach, and cost approach. Information requirements for each approach are also outlined.

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© © All Rights Reserved
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BE 4418 : Development Economics I

B.Sc. (Hons) in Facilities Management/ B.Sc. (Hons) in


Quantity Surveying
Department of Building Economics
University of Moratuwa

Terans Gunawardhana – Senior Lecturer


University of Sri Jayewardenepura
Concept of “Value”

Terans Gunawardhana
Senior Lecturer
University of Sri Jayewardenepura- Sri Lanka
“Value” in Political Science

C.350 BCE in Politics, Aristotle says that all


goods must be measured in value by one
thing—“need.”
Paradox of value
“All commodities,
as values, are
realized
human labor”.

Karl Marx
(1818–83)
Background factors:
The Swedish Hand-book
Fastighetsvärdering (Real
Estate Valuation):

- Utility/Benefit
- Scarcity
- Need
- Use/disposition
rights
- Transfer rights
Value theory
Background factors:
The Appraisal of Real Estate
Part I, Chapter 2 page 19:

- Utility/Benefit
- Scarcity
- Desire
- Effective purchase
power
- 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
•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
• 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
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
Relationship between subjective yield value
and market value

Buyer

Buyer´s
yield value

Seller

Area for presumptive transaction

Seller´s
yield value
• 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
Price ≠ Value ≠ Cost

(The Appraisal of Real Estate, 12th edition,

Chapter 2 page 19 -20)


Definition of market
value (1)
Number
of
transfers

Price

Market value

The most probable price of the


property on the open market
Market Value Definition by RICS

Valuations based on market value shall adopt the


definition and the conceptual framework settled by
the International Valuation Standards Council
(IVSC):
The estimated amount for which an asset or liability
should exchange on the valuation date between a
willing buyer and a willing seller in an arm’s length
transaction after proper marketing and where the
parties had each acted knowledgeably, prudently and
without compulsion.
Definition of market value (2)
Market value definition:
Some key elements:
- “ 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”
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!
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
Information needed
• Information about the purchase
– Price Seller: Mr Saman
– Date of sale Buyer: Mrs Perera
Date: 04-09-15
Price: 1 200 000
– Seller etc.

– Buyer

• Information about the real property


– Land use
– Land area
– Building: size, age, standard etc.
– Other special conditions
Income capitalisation
Rs.
approach (1)
Remaining
value

The current
Yearly net value of
income future yearly
net income and
remaining
value at
the end of the
calculation
period

0 1 2 3 etc . . . . n Year
Information needed
• Information about the real property:
– Land use
– Land area
– Building: size, age, standard etc.
– Yearly costs and incomes
– Other special conditions
The cost approach
Rs.
Replacement
costs
Depreciation 3.5 %/year

Cost of land Cost


value

0 10 Age (years)

Replacement costs 1 000


Depreciation 10 years 3.5 % - 350
Cost of land 200
Cost value 850
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
Real property valuation
Notice - a frequent mistake !
Economics

Mathematics
Statistics Land
planning

GIS
Sociology

Common
sense

Others
Real property valuation
Recommendation - a balanced and
appetizing mix !

Economics

Land
Mathematics planning
Statistics
GIS Sociology

Others Common
sense
Qs & As
Thank You!

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