Bases of Valuation.
Market Value basis
Valuation of a property is the determination of the market value which is defined as
“the estimated amount for which a property should exchange on the date of valuation between a willing buyer and seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”
The Market Value of a property is a conceptual framework and it does not depend on a sales transaction that materialise at the valuation date. It is an estimate of the price that should be realised in a sale at the date of valuation under the above definition.
Other Bases of Valuation
There are circumstances when Market Value basis of valuation is not used.
Depreciated Replacement Cost
This basis is usually adopted for specialised properties that are rarely, if ever, sold in the open market.
Market Value for the Existing Use or Existing Use Value
This is usually used on a property with the assumption that the asset could be sold in the open market for its existing use irregardless the existing use represents the highest and best use of the asset.
It is the value of a property has for a specific use to a specific user and it is not market related.
The value of a property as defined in the insurance policy.
Forced Sale Value
The price of which a property is sold under extraordinary circumstances, usually reflecting an inadequate marketing period without reasonable publicity or it involves an unwilling seller and disposal under compulsion.
This value could be applicable to a user or prospective user with a special interest. It could arise due to a physical, functional or economic association of a property with some other property such as the adjoining property.
This is a subjective concept relates a property to an investor with an identifiable investment objective. It should not be confused with the Market Value of the investment property.
Going Concern Value
The value of a continuing business from which apportionment of overall Going Concern Value may be made to constituent parts as they contribute to the whole.
Fair value requires the assessment of the price that is fair between two parties taking into consideration of the advantages and disadvantages that each will gain from the transaction.
Methods of Valuation
There are generally five recognised methods to valuation.
It is the most widely used method. Its relies on past market transactions and is supported by the theory that the market value of a property has a close relationship to the values of similar properties which have been transacted.
This method based on the theory that a property value comprises the value of the improvements and that of land. It is used on properties with few or no market transactions.
It involves the estimation of value from future income such as prevailing or sustainable rent using income capitalisation or discounted case flow methods.
The estimates of the gross development value of the property which is the capital value of the developed site with the assumption that the proposed development is fully completed.
This method is usually adopted for properties with trading potential and where the market comparables and current market rents for similar properties are not available.
When a valuation is commissioned, it is crucial for the Valuer to understand the purpose of the valuation for him or her to select an appropriate basis of valuation.