Methods of Property Valuation - Term Paper Example

Classroom Management The above sketch presents a street plan for the high street with properties being auctioned. A comparable could essentially be defined a property possessing similar characteristics with another property being valued (Schram, 2006). Comparable offers property critical information utilized by people in determining the values for properties being auctioned. The valuation process for properties situated in proximity to one another significantly utilises the comparable in establishing estimation for property value. The process of estimating values of properties considers numerous elements that might affect the property value. These factors form an essential part of comparable valuing. In determining a proper comparable various conditions must be satisfied to ensure the comparable remains closely related to the subject property. The subject property valuation utilises the value of comparable to determine the estimated property values. Within the property market, various elements affect the selection of a comparable for the subject property. The current market conditions might increase or decrease prices of property depending on the accounting systems employed. According to Rees and Hayward (2001) when selecting a comparable the location and physical appearance of the property must display significant similarities. The locations of property might influence the value of property if the properties under question could both be influenced by location characteristics. The conditions under which comparables are sold could potentially affect the suitability of a property as a comparable. A property sold understate settlement, for example, might be undervalued following the conditions involved. A proper comparable should be sold under prevailing market conditions and without restrictions on either party. Numerous methods of property valuation exist within the property market. The sales comparison approach remains the most utilized valuation method involving comparables (Betts & Ely, 1998). This method involves comparison of different units forming the characteristics of the properties under comparison. This consideration of different units creates a beginning point for establishing an estimated value for subject properties. The significant characteristics that could be considered include floor area, property condition, age, and distance from essential amenities, among other property attributes. Though these elements might be considered in valuation of property, the method relies heavily on the economic principles of demand and supply. Therefore, while a value might be calculated using the method, economic factors could present a different selling price depending on demand and supply forces. Assuming the subject property consists of 1200 square feet while the comparable is 1300 square feet, with a renting price of £8000 annually. The renting price for the subject property would be adjusted downwards. The downward adjustment would consider the floor area of these properties in comparison. A significant amount would be reduced for the subject property to cater for the difference present in properties in terms of area. From the calculations of the rent prices, the estimated for the comparable becomes £6.16 per foot. Since the different indicated in hundred feet, an adjustment of 616 pounds would be included for the subject property making the rent price to be £7384, which could be rounded-off to £7400. Rent per square feet for comparable = rent/floor area = 8000/1300 = £6.16 Since the difference in floor area is 100 square feet an adjustment of £616 becomes necessary Property rent = comparable rent – relative adjustment = £8000 – 616 = £7384 (7400) Within the context of freehold property, the calculations for the selling price would become slightly altered. Freehold properties appear to have different elements of consideration during valuation. This difference occurs because of the values attached to properties since the change in ownership within freehold leasing becomes permanent within freehold all structures – movable and immovable, become permanently transferred to different owners. The pricing for subject properties within the freehold ownership, therefore, considers more elements than those of leasehold. Properties sold under the freehold ownership include the land on which the properties stand. In valuing these properties, consideration of the value of immovable properties becomes essential in arriving at proper property value. The valuation of freehold properties would include consideration of different values attached to properties. Following other recently sold properties within the location, a market value fro freehold property could be established. This value, however, could be affected by other values attached to the property. A property being utilized for specified function would contain use value, upon whose consideration the valuation would become different. Since acquisition fro freehold properties remains permanent, investment value becomes essential consideration in the valuation process. In establishing property value, a consideration would be attached to the possible income that a property generates to the owner. All these elements of consideration aim at ensuring present owners become fully compensated for the loss of their properties. Within freehold property transactions, majority of the transactions consider property value other than the market value. Assuming a comparable apartment is sold for £200,000, this price would become the basis for comparison in determining the value of the subject property. The figure would represent the current cost for putting up a similar apartment within the location. This figure, though, would not indicate the true values of the subject property as other elements would become considerable before arriving at a final figure. The presence of other immovable properties surrounding the subject property could essentially increase the selling price for the property. Since immovable properties remain together with the subject property, their value must be established (Baum et al, 2011). The final price for the freehold property would include $200,000 and the value of immovable properties, less any existing encumbrances on the property. This valuation would be carried out following the cost approach method. Freehold valuation = comparable price + value of immovable properties (land) = $200,000 + 20,000 =$220,000 Rack-renting could be defined as leasing a property together with all the immovable properties usable during the lease period. Rack renting includes property owners charging tenants for all improvements implemented on the property and maintenance costs for the properties. While these elements would normally be seen as benefits accorded to the tenant by landlord, in rack renting landlords utilise their authority over the properties to charge extortionate rates fro rent. A subject property with renting value of £10,000 with improvements of £3000, maintenance costs of £4,000, and other miscellaneous costs of £3000 would be charged at the total cost for these figures. Landlords transfer all incurred costs towards the tenants, and threaten eviction of tenants fail to pay the entire amount. The yield for these properties is expected at 6% of the renting rate. Rack rent = comparable rent + yield = 10000 + 600 =£ 10,600 Income flow diagram Property rights Rent, maintenance costs and miscellaneous costs Reversion refers to the granting of future, property interest to a grantor upon conveyance of lesser estate than the subject property. Within the specifications of reversion once the leasehold granted to the tenant of the lesser estate expires the subject property reverts to the previous owner. The rights granted to the leasing party within reversion regulations are neither permanent nor exclusive. These rights remain valid for the period the individual holds the tenancy for the subject property. These rights could also become invalid following the demise of the tenant, hence, reversion of property to the initial owner. In simpler terms, though this tenancy appears permanent, it could be termed as a lifetime lease rather than permanent ownership. The holder of the reversion remains with rights of entry to the property for a period of time. Leasing through reversion for a period of 5 years, the renting price would be calculated according to the agreed value. In the above case, the property whose rate is £10,000 p.a would include a calculation using estimated property appreciation. The appreciation becomes a percentage of the rent. Renting a property for five years, with an appreciation value of 6% would leave the property valued at £66,900 at reversion. The calculation would be given by (1+ DR%)( to the power of AL) x FV. Where FV = final value, DR = discount rate, and AL = assessed lifespan The calculation would be given by = 1. 065 *50000 =£66,900 The income flow diagram for reversion appears as indicated below. Property rights Rent The rent on reversion remains similar to the value established during the time of valuation. This assumption assists investors to cater for depreciations that might occur during the leasing period. According to Kane et al (2004) this method of leasing prevents the possibility of fluctuation in returns for investors, through stabilising the income. During the leasing period, the landlord cannot review rent because of the regulations provided by the leasing contracts. Rental market According to Isaac (2002) the rental market for property follows numerous considerations regarding the perceptions of property owners. The investors seeking to protect their income from imminent occurrences of economic recession allowing income level to remain stable. The valuation methods used for office properties within the Holborn region would likely seek to achieve income stability. The fitting of offices with state of the art equipment aims at ensuring the rental prices present surmountable returns to investors. The comparable offices within the region contain lower quality equipment, therefore, the valuation for the modern office block should be higher than the other available offices. Using the comparison approach of valuation, the adjustment for the modern offices would occur in an upward direction, potentially increasing the renting prices for the offices. Residual valuation The residual method of valuation is calculated as the remaining sum of the net value of developing a property. This value is expressed in terms of development value of properties. The residual value for a land with the following specification as indicated below. Anticipated rentals are £45 per metre squared (net) whilst build costs are estimated at £100 per metre (gross), an applicable yield is 8% and the scheme is assumed to take 18 months from now to completion. You are to assume a finance rate of 9%. Using this information and other assumptions that you feel are necessary provide a valuation of the site. The land is assumed to be 450 metres squared. Residual value computation £ Gross development value for 4 units of 100m2 @ £45/m2 18,000 Less development costs - 10,000 Less minimum profit requirement of 8% on GDV - 1,440 Land value 6,560 Residual value per metre squared 14.57 The valuation of the hotel would follow the reversionary freehold valuation method. Through utilisation of the method, the owners of the hotel would avoid the imminent impacts of economic recession through maintaining a fixed level of income (Maliene, et al, 2010). This valuation method would also eliminate the risk of defaulting on the side of tenants through the contract agreement. The capitalisation for the reversion could be selected through a comparison method of similar properties leased within the location. This would ensure the valuation remains at par with prevalent market values, within the industry. References Baum, A. et al (2011) The Income Approach to Property Valuation (6th Edition). London: Routledge. Betts, R. M. and Ely, S. J. (1998) Basic real estate appraisal. New Jersey: Prentice Hall Isaac, D. (2002) Property Valuation Principles. London: Palgrave. Kane, S., et al (2004) Practical Applications in Appraisal Valuation Modeling. Chicago: Appraisal Institute. Maliene, V., et al (2010) Commercial Leisure Property Valuation: A Comparison of the Case Studies in UK and Lithuania. International Journal of Strategic Property Management, 14 (1), pp. 35–48 Rees, W.H. and Hayward, R.E. (2001) Valuation: Principles into Practice. (5th edition) London: Estates Gazette, Schram, J. F. (2006). Real Estate Appraisal. 2nd edition. Bellevue: Rockwell Publishing. Read More