Valuation of Properties

Real estate investments comprise the most significant component of real asset investments. For many years, analysts in real estate have used their own variants on valuation models to value real estate. Real estate is too different an asset class, they argue, to be valued with models developed to value publicly traded stocks. Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property’s market value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently. Not only that, but every property is different from the next, a factor that doesn’t affect assets like corporate stock. Furthermore, all properties differ from each other in their location – which is an important factor in their value.

In some areas, an appraiser doesn’t need a license or any certification to appraise property. Usually, however, most countries or regions require that appraisals be done by a licensed or certified appraiser (in many countries known as a Property Valuer or Land Valuer and in British English as a “valuation surveyor”). If the appraiser’s opinion is based on Market Value, then it must also be based on the Highest and Best Use of the real property.

Estimating the value of real property is important to a variety of endeavors, including real estate financing, listing real estate for sale, investment analysis, property insurance and the taxation of real estate. For most people, determining the asking or purchase price of a property is the most useful application of real estate valuation. This article will provide an introduction to the basic concepts and methods of real estate valuation, particularly as it pertains to real estate sales.

Basic Valuation Concepts Value
A main consideration in appraising is to determine a property’s value: the present worth of future benefits arising from the ownership of real property. Unlike many consumer goods that are quickly used, the benefits of real property are generally realized over a long period of time. Therefore, an estimate of a property’s value must take into consideration economic and social trends, as well as governmental controls or regulations and environmental conditions that may influence the four elements of value:

Demand – the desire or need for ownership supported by the financial means to satisfy the desire;
Utility – the ability to satisfy future owners’ desires and needs;
Scarcity – the finite supply of competing properties and
Transferability – the ease with which ownership rights are transferred.

Value Vs. Cost and Price
Value is not necessarily equal to cost or price. Cost refers to actual expenditures; for example, materials and labor. Price, on the other hand, is the amount that someone pays for something. While cost and price can affect value, they do not determine value. The sales price of a house might be $150,000, but the value could be significantly higher or lower. For instance, if a new owner finds a serious flaw in the house, such as a faulty foundation, the value of the house could be lower than the price.

Market Value
An appraisal is an opinion or estimate regarding the value of a particular property as of a specific date. Appraisal reports are used by businesses, government agencies, individuals, investors and mortgage lenders when making important decisions regarding real estate transactions. The goal of an appraisal is to determine a property’s market value: the most probable price that the property will bring in a competitive and open market. Market price, the price at which a property actually sells, may not always represent the market value. For example, if a seller is under duress because of the threat of foreclosure, or if the property was sold in a private sale without being exposed to the open market, the property may sell below its market value.

Helping you assess the value of developed and undeveloped properties

Property valuations are playing a large role for Canadian real estate companies, especially since the advent of International Financial Reporting Standards (IFRS). Valuations of both developed and undeveloped property are required in the real estate industry for many different reasons. These include:

Transactions (i.e. acquisitions, dispositions, privatizations, restructurings and estates valuations)
Audit support in the preparation of balance sheets and financial reports (i.e. impairment tests, valuations according to IFRS)
Financing of Real Estate
Tax optimization
Insolvencies, liquidations
Valuations for insurance purposes

How PwC can help

We offer real estate valuation training and assistance on appraisal processes/ procedures, e.g. valuation methodologies, scope of work, highest and best use, and types of ownership interests. Our risk assessment services are provided in the form of stress testing tools.

For market value opinions, we can provide reports and analysis that will include:

Plausibility checks
Market analysis
Examination of yield and rental rates
Calculation of construction or demolition costs
Site analysis
Financial due diligence

In valuation administration, we manage the appraisal process on your behalf. This includes assisting you in selecting and engaging a third-party appraisal firm, co-ordinating the flow of information between you and the appraiser(s), performing appraisal reviews and resubmitting to third-party appraiser(s), and reporting final value.

We Will Help you get it right