Reliability of Contemporary Appraisal Methodologies against Traditional Approaches - Case Study Example

s Property Valuation Reliability of contemporary appraisal methodologies against traditional approaches 11/14/2009 Figure Image by courtesy of (Property Portal, N.D.) Table of Contents Table of Contents 2 Introduction 3 Reliability of Contemporary Appraisal Methodologies 4 Reliability of Contemporary techniques in case of Reversionary investments 6 Reliability of Contemporary techniques in case of Rack Rented property 9 Conclusion 11 Works Cited 12 Bibliography 13 Introduction Property appraisal is a fairly complex phenomenon and involves numerous methodologies to ascertain the precise or adjacently close price of any particular property. Nevertheless, the chief principle of property valuation lies in three basic principles; the first being the location of the land, the second being the type of property, and finally the usage of property (Scarrett, 2008 pp. 1, 4). Modern property appraisal methodologies that involve quantitative analysis and determination of optimum usage of property are becoming extremely common amongst dealers & constructers as these contemporary methodologies are much more accurate and reliable as and when contrasted against traditional approaches of property valuation and management. Modern approaches of property valuation ensure that operators and other massive investors do not use the traditional approaches to their own personal advantage. Some analysts believe that the property bubble could have been avoided if the property prices had stayed on track. A diminutive part of the bubble-burst is also blamed on brokers, as even today most of the populace do not use a certified property valuator and just get their estate agents to estimate a value for them. Although, contemporary methods are much more complex and time consuming as compared to traditional methodologies that are less effective and easily manipulated, but the old methods do provide results within an extremely shorter time frame. As a matter of fact, with the increasing popularity of the Web 2.0, one may easily search for the property prices using old methodologies such as “Comparable sales” online through various WWW region specific services, such as a decent website for such an analysis in the UK is www.mouseprice.com. (Calnea Analytics Limited, N.D) Through this essay, the author has pointed out the risks inherent within valuation of property through traditional approaches and how does contemporary techniques help avoid these loopholes. Reliability of Contemporary Appraisal Methodologies At the outset, no two properties can ever be valued at an analogous value as no two properties are the same. A property might be worth much more for a particular occupier, whereas that same property could be worth nil to another. (Kilpatrick, 2004) The traditional property valuation methodologies used to focus much more on the property’s location and rates of surrounding property; but the new methodologies focus more on the use of a particular property. Nevertheless, even according to the modern approaches, a property may be of a significantly distinctive value for two different buyers. For example, a wheat farmland might be worth more to a wheat farmer than to an occupier who wants to set up a ranch. Therefore, a wheat farmer will consider looking at his income perspective from that land, and if the ROI is settled to be in about 5 years, then the farmer will not pay if the value of the land exceeds that of the ROI valuation; that is if the other occupier is willing to pay more than the farmer’s final bid. In layman’s terms, the ‘market value’, although still being an important factor whilst deciding on the purchase, is still not as significant as the ‘worth’ of the property in contemporary appraisal philosophies. This is the reason why contemporary appraisal methodologies are more reliable, as they seldom take market value under perspective. Considering the trustworthiness of new theories, these theories are mostly based on extremely structured quantitative analysis and a proper and systematic data collection and analysis technique, which make them more trustworthy than any traditional concept. So basically the valuation of a property is done simply by their income potential rather than their price tags set by manipulators. Although, for corporate offices and residential properties, which are generally more homogenous, other factors such as status play a big role. Nevertheless, generally in the present timeframe, wherein, some property prices may be quite lower or substantially higher as and when compared to the market value of the property, this is mostly the case whilst dealing with residential property, although under some circumstances, this may also hold true for commercial property. Certain situations and factors like emotional influence, obligatory immediate requirement of money to the seller, or personal preferences may motivate a buyer to pay quite more or a seller to sell for less. Therefore, it is almost always imperative for a seller as well as the buyer to always think logically without emotional preference in case of real estate deals. The afore mentioned is also a diminutive reason as to why there cannot exists an open property market similar to those of other investments like stocks and derivatives. Moreover, this is why scientific appraisal methodologies have rapidly emerged taking over and sometime working in conjunction with traditional property valuation principles. New techniques such as unit based valuation and investment ratings have been proven far more accurate as they not only consider market value and emotional factors, but also help the buyers select the most tailor made buildings as these techniques focus on a greater magnitude of scale and quantitative analysis. Reliability of Contemporary techniques in case of Reversionary investments Reversionary properties are very exclusive and specific deals upon which the return on investment may not only be confined to market conditions and geographical demographics, but rather, a major governing factor of ROI on reversionary properties is based on the seller of the property. Within a traditional deal, the basic age and an overview of the condition of the seller was taken under perspective, but now thanks to RICS’ state-of-the-art data collection methodologies and edification of the appraisers on the novel appraisal techniques, decision making for reversionary investments have become as easy as selecting a car. Contemporary techniques do take under consideration various traditional factors such as income capitalization and cost approach, as well as numerous novel factors such as the exact condition of the seller and average age of death within a specific region. (Galaty, et al., 2002 pp. 300-323) A contemporary appraisal research in its complex form would take place as follows: As witnessed within the above flow chart, that contemporary analysis techniques have bestowed upon the investor an upper edge over other investors in terms of gathering and using specific data that would not have been possible using traditional approaches to investment in reversionary properties. Saying that the investor would have incurred a loss using traditional approaches would be untrue, but with the help of contemporary techniques, the investor has just gained an edge over traditional dealers and investors, by ensuring a better return on investment. Reliability of Contemporary techniques in case of Rack Rented property Spontaneous data availability and analysis has helped occupiers and sellers like wise to estimate the actual value of a property keeping emotional preferences out of the way. However, under some cases being trapped in the loophole of rack rent is more concerned with contractual or legal basis rather than emotional. Such as in the case of long-term leases, this may also turn out in the occupiers favour if the investment if the property index suddenly shoots up. As far as the risk factor is concerned, Carrie Bay suggests that the largest risk in the property markets is that of valuation (Bay, 2009), these data are inclusive of mortgage valuation related frauds, of which the harmful effects are being witnessed now. Mortgage frauds are 46% higher (Bay, 2009) as compared to last year; this again points the finger at contemporary valuation methodologies and their trustworthiness, but also clarifies the fact that these frauds are not as much a result of valuation techniques than they are of the appraiser. Under most rack rent cases, the wear and tear or the maintenance is also the responsibility of the occupier, which makes it even more difficult than it already has to be. Conventional appraisal techniques only considered rent, tenure, and sometimes yearly purchase in interest (MacLeary, et al., 1988 p. 74). Whereas, modern techniques takes several other imperative factors and costs under consideration such as costs associated with purchase and management costs, which even though sometimes cause lower valuation, but provide actual valuation compromising of most risks involved with valuation. Contemporary techniques used to provide incomplete valuations, as the costs associated for the lender and the occupier were always insufficient; this was a major dilemma that needed to be corrected and thus the implementation of modern techniques grew significantly. Besides the above, optimum data availability has helped occupiers to look at a varied choice of properties available on lease or rent, which if calculated accurately with the highest and best use principle may help prevent the occupier from any anon losses. As now the occupier may select the property according to not only the market value and status factors, but best usage allows them to look at multiple options based on the property’s income earning potential, besides this, raw land is also emerging as a preferred property in case of industries. Conclusion Quantitative and scientific analysis has emerged as the leader in terms of valuation methodologies, in not only the property markets, but other investment as well as academic fields too. The sole reason for which is the greater precision in terms of ascertaining the risks involved with the investment. Growing databases and diminishing ‘market value’ philosophies have also given rise to these new techniques for evaluation, as now an occupier can look for and compare various properties suited for his needs at the comfort of his own home or office with the help of emerging World Wide Web outlook. These factors have helped the users diminish the risks associated with property valuation, even mortgage lenders and banks have resorted to scientific analysis considering the growing amount of valuation frauds. Specialized properties such as revisionary and almost all rack rented properties require certain distinctive and specialized means of appraisal methodologies, which has been bestowed by the means of contemporary scientific analysis models and automatic appraisal models, of which the popularity is impressively increasing. The risks associated with specialized properties (except for valuation frauds) such as lower or higher valuation, monopolist conduct, and wear and tear; may all be analysed effectively by novel means. Thus leading to a more secure and risk free analysis. Novel communication means may also be credited for such techniques to be fruitful as it is solely because of easier communication that the data for a vast and immeasurable market is available to everyone at just a click of a button. Works Cited Bay, Carrie. 2009. Property Valuation Fraud is Industrys Highest-Risk Area: Report . DS News. [Online] October 27, 2009. [Cited: November 12, 2009.] http://www.dsnews.com/articles/property-valuation-fraud-is-industrys-highest-risk-area-report-2009-10-27. Calnea Analytics Limited. N.D. http://www.mouseprice.com/. [Online] Calnea Analytics Limited, N.D. [Cited: November 10, 2009.] http://www.mouseprice.com/. Galaty, Fillmore W., Allaway, Wellington J. and Kyle, Robert C. 2002. Modern Real Estate Practice. s.l. : Dearborn Real Estate, 2002. ISBN 0793144280, 9780793144280 . Kilpatrick, John A. 2004. Real Estate Issues in Class Certification. Seattle : Mundy Associates, 2004. MacLeary, A. R. and Nanthakumaran, N. 1988. Property investment theory. s.l. : Taylor & Francis, 1988. ISBN 0419147705, 9780419147701 . Property Portal. N.D.. propertyportal.ae. [Online] N.D. [Cited: November 10, 2009.] http://www.propertyportal.ae/blogs/wp-content/uploads/2008/06/invest-dubai-property.jpg. Scarrett, Douglas. 2008. Property Valuation: The Five Methods. s.l. : Taylor & Francis, 2008. ISBN 0415423252, 9780415423250 . Bibliography Isaac, D and Steley, T. 2000. Property Valuation Techniques. Basingstoke : Palgrave Macmillan, 2000. Isaac, D. 2003. Property Finance. Basingstoke : Palgrave Macmillan, 2003. Read More