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Overview of Valuation

Valuation is an estimate of value that aims to be unbiased and knowledgeable. It has elements of both science and art. Value arises from an asset's utility and ability to be exchanged. Price is what is paid, cost is what is required to acquire an asset, and value is an opinion of economic benefits. Market value estimates the price from a willing buyer and seller. Other values include assessed, insurable, investment, and liquidation values. Valuation is used for sale, financing, taxation, and other purposes. The process involves identification, data analysis, and applying techniques like sales comparison, cost, and income approaches to estimate value.

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111 views16 pages

Overview of Valuation

Valuation is an estimate of value that aims to be unbiased and knowledgeable. It has elements of both science and art. Value arises from an asset's utility and ability to be exchanged. Price is what is paid, cost is what is required to acquire an asset, and value is an opinion of economic benefits. Market value estimates the price from a willing buyer and seller. Other values include assessed, insurable, investment, and liquidation values. Valuation is used for sale, financing, taxation, and other purposes. The process involves identification, data analysis, and applying techniques like sales comparison, cost, and income approaches to estimate value.

Uploaded by

Frimpong Gabriel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Overview of Valuation

Definition of Valuation

An Estimate or OPINION of value


• An UNBIASED estimate or opinion
• A KNOWLEDGEABLE or a LEARNED opinion of value
• A SUPPORTED estimate of a defined value.
Is Valuation a Science or an Art?
• Science is:
– knowledge or a system of knowledge covering
general truths or the operation of general laws
especially as obtained and tested through
scientific method
• Art is:
– something that is created with imagination and
skill and that is beautiful or that expresses
important ideas or feelings
What is Value?
• Defined as the worth of a commodity
• Arises out of ;
– Utility to an individual (value in use)
– Ability to command other commodities in
exchange (value in exchange)
• A commodity has value-in exchange only
when it meets the following conditions;
– Scarce
– Transferable
Price, Cost and Value
• Price is the amount asked, offered or paid for an
asset.
• Cost is the amount required to acquire or create the
asset.
– When that asset has been acquired or created, its cost is a
fact.
• Value is not a fact but an opinion of either:
– the most probable price to be paid for an asset in an
exchange, or
– the economic benefits of owning an asset.
Market Value
• The type most widely used in market
transactions.
• The result of the interplay of demand and
supply
• A commodity has market value if it is;
– Useful
– Scarce
– transferable
Market Value
• The International Valuation Standards (IVS) defines
market value as:
“ the estimated amount for which an asset 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.”
Other Types of Value Estimates
• Assessed value
– is a value that is based on definitions contained within applicable laws relating to
the assessment, rating, and/or taxation of property.
• Insurable value
– value of property provided by definitions contained in an insurance contract or
policy.
• Investment value
– assigned to a particular investor and depends on the individual’s investment
criteria such as target return, taxes, cost of funds, portfolio make-up etc.
• Going concern value
– The value of a business as a whole.
• Liquidation or Forced Sale Value.
– The amount that may reasonably be received from the sale of a property within a
time frame too short to meet the marketing time frame required by the Market
Value definition.
The Joint Use of MV and IV
• Market value is only an indicative of the
probable price.
• The actual price that may be paid for the
property depends on the purchaser’s
investment value.
• Where MV > IV, no transaction will take
place.
• Where MV < IV, transaction is likely to take
place.
Purposes of Valuation
• Why estimate value?
– Sale or transfer of ownership
– Mortgage
– Insurance
– Compensation
– Taxation
– Basis of rental schedules and lease provisions
Bases of Value
• The basis of value is a statement of the
– Fundamental measurement assumption of a valuation.
– A basis of value influences
• The choice of methods of valuation
• The inputs and assumptions used in the valuation
• The opinion of value
• The choice of a basis of value is influenced by
– the purpose of the valuation
– statutes, regulations or private contract
Bases of Value
• The following are the common bases of value:
– Market Value
– Market Rent
– Investment Value/Worth
– Equitable Value
Bases of Value
• Market Value
– 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.
• Market Rent
– the estimated amount for which an interest in real property should
be leased on the valuation date between a willing lessor and a
willing lessee on appropriate lease terms in an arm’s length
transaction, after proper marketing and where the parties had
each acted knowledgeably, prudently and without compulsion.
Bases of Value
• Investment Value
– the value of an asset to a particular owner or prospective
owner for individual investment or operational objectives.
• Equitable Value
– the estimated price for the transfer of an asset or liability
between identified knowledgeable and willing parties that
reflects the respective interests of those parties.
The Valuation Process

Physical and Legal identification

Identify property rights to be valued

Specify the purpose of the appraisal

Specify date of value estimates

Gather and analyze market data

Apply techniques to estimate value


Methods of Valuation
• Traditional Methods include:
– The Sales comparison approach
– The Cost approach
– The Income approach
• Other Methods
– Residual Method
– Profits Method
• The choice of method depends on
– The nature of the property
– The purpose of valuation
– Availability of data

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