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Date Posted: 07:20:03 09/29/01 Sat
In reply to:
Becky
's message, "Join Equilusions" on 17:49:20 08/28/01 Tue
Discuss the stengths and weaknesses of using comparable data when valuing property
Topic1
Modern Method of Valuation
P13-14
Chapter 2
Methods of valuation
1.Variety of methods
A valuer is called upon to give his opinion as to the
value of many differing purposes.
Given such a multiplicity of situations the approach
to the determination of value in
one case may well be inappropriate to another and
there have consequently evolved over the years several
distinct approaches which constitute separate methods
of valuation.
2.Comparsions
Although,as will be seen,the methods of valuation
differ significantly,underlying each of them is the
need to make comparsions since this is the essential
ingredient in
arriving at a market view.In any market the vendors
compete with other vendors in attracting the purchaser
to them and the purchaser is thus faced with a
choice.In
reaching his decision the purchaser will compare what
is available and what price and he will purchase the
good which in his opinion gives the best return for
the price
paid:he seeks value for money.This will be ture in all
but the most monopolistic or monopsonistic market. The
valuer,in arriving at his opinion of value,must try
and
judge what prices vendors generally would seek and do
obtain and what choice purchasers would make.He must
therefore assess what is now or has recently been
available in the market place and ,make comparsions
between them.In this he acts no differently from any
other person making a valuation:for example a person
valuing a motor car would assess the number and types
of cars available and the prices currently being
obtained and so arrive at
the price which in his opinion would attract a
purchaser
for the motor car in question.The key to the accuracy
of
the opinion is the knowledge of what prices have been
obtained recently for similar goods with which
comparison
can be made.This evidence of comparable transactions
in
property market is termed ‘comparable’and,as will be
seen,the availability and the nature of comparables
provide
the basis of whatever method of valuation is adopted
and,indeed,the choice of the method itself.
3.Principal methods of valuation
1.Direct Capital Comparsion
The simplest and most direct approach in arriving at a
value is to compare the object to be valued with the
prices
obtained for other similar objects.The method works
best
if the comparable objects are identical.For example,if
ordinary shares in a company are each selling at 108p
then
the value of further shares is likely to be around
108p.
Special factors may alter this view:if a large block
of
shares were offered which would give control of the
company then a purachaser might be prepared to offer
more
than 108p per share. Thus even in the case of
identical
goods some judgment is required in arriving at a
value.Property can never be absolutely idential so
that
the use of this method is limited to the simplest
cases.
Charter 4
Direct value comparsion
1.Generally
The simplest and most direct method of valution is
direct
comparsion.The method is based on comparing the
property
to be valued with similar properties and the prices
achieved for them and allowing for differences between
them,so determining the price likely to be achieved
for
the property in question.
The method is based on a comparison of like with
like.Properties may be similar but each property is
unique
so that they can never be totally alike.As they move
away
from the ideal situation of absolute similarity so
does
the method become more unreliable.The reasons for
dissimilarities are mainly:
(a)Location.The position of any property is clearly
unquire.The actual position is an important factor in
the
value of a property and for some,such as shops,the
major
factor.For example,on an estate built to the same
design
at the same time,some houses will be nearer to a busy
traffic road than others:some will be onhigher ground
with
good views whilst others will be surrounded by other
houses:some will back south,others back north:some
will
have larger plots than others.Even in a parade of
shops,some will be nearer a street crossing than
others or
be adjacent to a pedestrian exit from the car park or
nearer to a popular large store.
(b)Physical State. The physical condition of a
property
depends on the amount of attention which has been
given to
maintenance and repair and decoration. Two otherwise
physically identical properties can be in sharp
contrast
if one is well maintained and the other in poor order.
Repair apart, occupiers of properties typically make
alterations, varying from a minor change to major
improvements. This is perhaps most apparent with
residential properties where occupiers may instal
central
heating, renovate kitchen and bathrooms, change
windows,
remove fireplaces, add extensions and so on, to the
extent
that houses which from external appearances are
identical
are seen to be totally different on closer inspection.
(c)Tenure. Apart from a freehold interest with no
subsidiary leasehold interests, the likelihood of
interests
being similar is remote in view of the almost endless
variations that may exist between them. Even on an
estate
with estate leases which allow for each tenure to hold
on a
similarly drafted lease, the terms are likely to vary
as
to expiry date or rent payable or permitted use. In
the
market at large the differences will multiply
considerably
and the method is strained to compare say a leasehold
shop
with 45 years to run a rent of ?00 p.a with tenant
responsible for all outgoings apart from external
repairs
and no limitations as to use,with the leasehold
interest
in a physically identical shop with 8 years to run at
a
rent of ?,000 p.a with rent review in 3 years, tenant
responsible for all outgoings and the use limited to
the
sale of childrens?clothes. If the first lease sells
for
?00,000 it is impossible to derive the capital value
of
the second lease directly from the figure-it is
certainly
less, but how much so? This contrast between the types
and
nature of interests is the principal barrier to the
use of
the direct comparison method for the valuation of
interests other than freehold in possession.
(d)Purpose. The purpose of a valuation is an important
element in deciding upon the method to be
adopted.Where
the valuation is for example for investment purposes,
or
for the fire insurance purposes,the direct comparsion
method would be inappropriate since other methods will
give a more realistic answer.
(e)Time.Transactions take place in the market
regularly.The
market is not static so that the price obtained for a
property at one time will not necessarily be achieved
if
the same property is sold again.Thus the reliabilty of
evidence of prices diminished as time elapses since
the
transaction took place.In the volatile market which
has
developed in receny years,only a short time will pass
before the evidence becomes unliable.
Given the special characteristics of property and the
drawbacks these create in adopting the direct
comparsion
method,it is clear that it is of limited
application.In
practice only three types of property lend themselves
readily to the use of the method and in each case only
when
the freehold interest free from any leasehold estate
is
being valued.The three types are considered below.
2.Residential property
The great majority of all property transactions
comprises
the sale of houses and flat with vacant possession.As
the
direct comparison method is adopted for the valuation
most commonly used.It is true that flats are generally
held
leasehold interests but since these tend to be for a
long
period of years at a relatively small rent they often
have the general characteristics of a freehold so
allowing
direct comparsion.
Example4-1
A owns the freehold interest in a house which is to be
sold
with vacant possession.The house was built in 1934.It
is
semi-detached with 3 bedrooms,bathroom and separate
W.C on
the first floor and a through lounge and kitchen on
the
ground floor.There is a garage lying to the rear of
the
house with an access shared by the adjoining houses.
Apart from taking down the wall between the former
front and
rear rooms to form a single lounge,and the
installation of
oil fired central heating,no improvements have been
carried out.It is considered that both the bathroom
and
kitchen need to be modernised.The property is in a
fair
state of repair.
Several nearby similar properties have sold recently
for prices
in the range ?8,000 to?4,000.The most
recent include a house in the next pair to A’s
house,built
at the same time and with identical accommodation but
without central heating.However,the bathroom has had a
new coloured suite installed with matching tiling.
and new kitchen units were installed some 4 years ago.
It is in good repair. The house sold for
?1,500.Another house in the same basic
accommodation
but with modernised kitchen and bathroom,cental
heating and ground floor cloakroom, and also having an
independent drive to the garage, in good repair,sold
recently for ?4,000.
Valuation.It appears that a house such as A’s with
the basic amenities and modernised and in good repair
is worth around ?1,500 without central
heating.
Assume that with central heating the value would be
?2,250.This appears to be realistic since a
simliar
house but with ground floor cloakroom and
independendent drive to garage sold
for?4,000(an
allowance of ?,750 for these further factors
seems
reasonable)
Allowing ?000 for the cost and trouable of
modernising the bathroom and kitchen,it appears that
the value of A's house is ?0,250 in good
repair.
Allowing for the lower standard of repair, the value
of A's house is ?9,750
It is clear from this example that it is necessary to
make various allowance for the differences in quality
between the houses.The level of allowance is
subjective and depends on the experience and knowledge
of the valuer.This example illustrates that the
method is simple in its general approach but it is
dependent on conciderable valuation judgment for its
application.
3.Agricultural Property
Agricultural land is divided between land let to tenants by the freeholder and land farmed by the freeholder. In the latter case, in any sale the freehold interest is offered with vacant possession. This allows for differences such as the quality of the soil,type of farming possible,extent and condition of buildings, location, and quality of the farmhouse and other accommodation. Farms vary considerably in size and the valuer allows for this difference by adjusting the comparable evidence to a common unit of value,the price per hectare.
Example4-2
Value the freehold interest in writeacre, a farm of 180 hectares.The farm is good arable land with a full range of modern buildings.
The evidence of recent sales includes the sale of greenacre,a farm of 200ha with a better land than whiteacre, a farm of 170 ha with poor arable land and poor arable land and poor buildings which sold for ?0000:and Roseacre, a farm of 30 ha with good land but few buildings which sold for poor buildings which sold for ?70,000.
Analysis of Comparables
Greenacre 200ha ?000000good arable good buildings ?000 per ha
Blackacre 170ha ?00000 poor arable poor buildings ?941 per ha
Roseacre 30 ha $170,000good arable few buildings ?667 per ha
It appears that arable land has a value range of ?667 per ha and ?941 per ha. It is noted that the highest value is for a smaller area than usual which suggests that the overall farm size may have a special significance.It seems that the value of Writeacre therefore lies around ?,750 per ha.
Hence
Valuation 180 ha at ?750 per ha = ?55000
4.Development land
In many instances property will be sold which is suitable for development or redevelopment and this is referred to as development land or building land. The types of development land range widely,reflecting the many forms of development which are possible and the variation in size and location of such
land, There is one type ,However,which tends to have many qualities common to each,development land for residential development. For this reason,residential building land may be valued using the direct comparison method.
The valuer,in analysing the comparables will need to allow for such factors as the type of development contemplated,e.g.from luxury houses to high density low cost accommodation;the site conditions,e.g. level or sloping, well drained or wet; and location in relation to general facilities, such as transport,schools,hospitals. The comparable sites will vary in size and the valuer therefore reduces the evidence to a common yardstick. This may be value per acre, value per plot or per unit, or value per habitable room.For example, the price of a site of 10 acres sold for ?500000 with permission to build either 90 4-room houses or 120 3-room flats may be expresses as:-
?50000per acre-?7778 per plot-?0833 per unit-?944 per habitable room
The valuer will use whichever yardstick is appropriate to the type of sites he is valuing, the main essential being to apply the same yardstick to all cases.
Example 4-3
Value the freehold interest in 5 acres of residential building land with the right to build 42 houses. Recent comparable land sales include
(a) 7.5acres with the right to build 60 houses, sold for ?800000
(b) 12.5 acres with the right to build 125 houses, sold for ?125000
(c) 1 acre with the right to build 6 houses, sold foe ?00000
Analysis of Comparables
(a)7.5 acres;60 houses(8 houses per acre);?800000:?40000 per acre or ?0000 per house plot.
(b)12.5 acres;125 houses(10 houses per acre); ?125000:?50000 per acre or ?5000 per house plot.
(c)1 acre;6 houses(6 house per acre); ?00000;?00000 per acre or ?0000 per house plot.
The analysis that building land is worth ?40000 to ?00000 per acre or ?5000 to ?0000 per house. Where more houses are to be built on a given area (the ‘density? it is assumed that the house falls, and also the land on which it stands, although conversely the value per acre rises since the builder will have higher output and presumably higher profits overall. Site (c) has values outside the general range since it is a small development which would attract a different type of buyer, and it also has a low density so that large and high value houses are to be built. The higher value of (c) supports the general value evidence of (a) or (b).
Hence the site to be valued, which has a density of 8.4 houses per acre, appears to lie within the general band of values.
Valuation
5 acres at say ?75000 per acre =?375000
or 42 houses at say ?2500 per house plot=?365000
Value say =?370000
Although residential building land may be valued by direct comparison, it is possible to cross-check the valuation by valuing the interest using the residual method of valuation which is typical method for valuing development land.
The valuation of property investments
P64-70
(1)The Comparative method
The comparative method of valuation entails analysing transactions to determine the price or rent achieved and when applying the information to the property to be valued. Whether it is rental value or capital value which it is sought to determine will depend on whether the type of property is normally let or sold with vacant possession. Dwellings let on statutorily controlled rents present a potential problem to the valuer in that, although they are let to produce an income, a speculator purchaser may be more interested in the possibility of making a capital gain on obtaining vacant possession. Such properties are therefore often valued as a percentage of their vacant value-say 50% or whatever the particular circumstances warrant.
Ideally the comparative method should only be used when the properties being compared are similar and in the same area; where there are efficient records of frequent recent transactions; and where the market is relatively stable. In practice it may be necessary to make a valuation when one or more of these conditions is not present. For example the market may be at a low ebb and evidence may be sparse. In this situation the valuer will have to use his knowledge and experience to interpret information which he would otherwise seek to avoid using, such as evidence of transactions from the not so recent past or from areas outside that in which the subject property lies.
It is axiomatic that the more homogeneous a class of property the easier it is to compare properties one with another within that class. Within the commercial sector, modern offices or factories in similar areas are easier to compare than say shops, which vary greatly according to individual position.
No two properties can ever be identical, because their locations will always differ. In comparing one property with another, this and other differences must borne in mind and taken into account. Such differences might include the position, the plot size, the floor area, the number and arrangement of rooms, the architectural design, the age and condition, and any special features.
Comparison
Comparison is the cornerstone of valuation. It is used not only in the valuation of property but the valuation of Stock Exchange investments, work of arts, antiques , second-hand cars, and other commodities or investments where there is a relatively fluid market. Hence means of comparison in property investment field are considered in some detail in this section.
Units of Comparison
Two properties may be so similar that if they value of one is known it may be applied directly as the value of the other. This frequently occurs where a number of new properties have been built which for all practical purposes are the same as one another. Examples of this would include flats within a block, standard shop units on a new parade, or new factory units of similar size and design on the same estate.
In the case of commercial properties and sits for commercial property, provided the design of any buildings is standard and meets modern requirements, the chief variable for properties in the same locality is likely to be size. Thus it is usual to compare such properties according to area. Assuming a minimum standard ceiling height, cubic content of buildings may be irrelevant expect that an excessive ceiling-height may cost more to heat and clean or alternatively could be used for storage.
If floor areas of buildings are to be compared it follows that the method of measurement should be consistent. Unfortunately in practice this is not always the case, and the point should be borne in mind when using information supplied by third parties, although an attempt has now been made to regularise the position with the publication of the document ‘Code of Measuring Practice? Except in the valuation of industrial units, it is normal for net lettable floor space to be measured: this would exclude lift shafts, stairwells, corridors, w.c’s and other areas essential to the use of the building regardless of size. Areas such as store cupboards, which may be regarded as additional features, should be measured separately as in the subsequent valuation the valuer may decide that a different value per square foot or square metre should be applied to such space. Industrial units are normally measured on a gross internal basis. The important maxim in valuation of ?as you analyse so shall you value?applies here as elsewhere. If information supplied is on the basis of gross internal floor area then clearly this is the way in which it must be applied to the subject of the valuation.
In the case of hi-tech buildings, a new basis of measurement is needed as offices and industrial properties are measured differently. At the time of writing, there is no general consensus on the point as to whether these relatively new types of buildings should be measured gross or net internal. The tread seems to be to a net internal basis.
The value of a site for commercial development is dependent upon the amount and the value of the floor space which can be provided according to the planning permission available. It is therefore common to compare such sites in terms of the amount of floor space which can be provided, leaving it to the valuer to judge the value of that space. Hence the value of site A may be twice as much as that of site B, which is the same size, simply because the plot ratio(the ratio of gross external built floor area to site area) for A is twice that for B. But, according to the circumstances of the case, there may be factors which in the valuer’s judgment militate against such a simple relationship, and these would need to be taken into account.
The simple relationship between floor area and value which is common in the valuation of commercial property is less common in the valuation of residential property and residential building land. The factors which potential tenants/purchasers of dwellings usually consider important may be far more subtle. Nevertheless, the floor area of a dwelling is frequently used as a basis for rating and fair rent assessments where dwellings are of a similar type.
Other bases of comparison may be used in the case of more specialised properties such as ‘per person registered?in the case of care homes, or ‘per person occupancy?in the case of hotels. In making comparisons between properties in these cases care will need to be taken in making adjustments for quality and type of accommodation offered and addition or subtraction may need to be made relating to the number and type of communal rooms and the size and quality of proprietors?accommodation if any.
Zoning of shops
In considering commercial property, it is generally recognised that shops are a special case. This is because different parts of the shop may be worth different amounts.
The shop frontage and the area immediately behind are used for display and attract customers into the shop, and the therefore the most valuable. Conversely the part at the near of a shop may be a little use as sales space, and hence reserved for storage or other ancillary uses. Accordingly a small proportion of the overall value is usually attributed to this area.
To take account of the foregoing it would therefore not be correct to compare shops of different sizes purely by overall floor area. Regard must be had to the fact that frontage is more important than depth. Where shops are of similar depth, this may be done by comparing frontages. Where this is not the case it is common to analyse according to ‘zones?of floor area.
There are no hard and fast rules about the size and number of zones to be adopted. Practice varies according to locality and circumstances. But in the absence of contradicting circumstances it is common to divide a shop into zones of approximately 20 feet (or 6 metres) depth each and a remainder, and to assume that the front zone(zone A) is twice as valuable as zone B per square foot or metre which in turn is twice as valuable as the remainder pro rata. This is known as the ‘halving back?principle.
Upper and lower floors and storage space may be valued separately according to the evidence, and an additional value may be attributed to corner shops on account of the return frontage. Having analysed by zoning ,it may be decided that a pro rata deduction should be made for a particularly large shop to take account of the economics of scale in constructing, maintaining and managing such a unit. Such a ‘quantum allowance?as it is termed, may also be found to be appropriate to take account of the bargaining power of the large retail multiples. It may also be noted that in view of the considerable depth of such units which is all usable retail space, the zoning principle is frequently found to be inappropriate.
The zoning process explained above is a regular and rather arbitrary affair sometimes known as ‘geometric?zoning.In a particular case, different ‘natural?zones may present themselves. Thus out of a row of six shops, two may be kiosks with depths of 4 metres ,two may have depths of 18 metres,and two depths 25 metres. If the rental value of one of the kiosks is known it may be decided that this should be applied to the valuation of a 4 metre zone A on one of the lager shops. If the rental value of one of the 18 metre deep shops is known the valuer may decide that the natural depth for a zone B for the largest shops is 14 metres (18 metres less 4 metres), and so on. It must be emphasized however that these variations on the conventional geometric zoning would be extremely unusual.Kiosks of course do not lend themselves to zoning being too small and disproportionately valuable according to floor area. An alternative to zoning has been propersed which involves comparison and valuation on the basis of a combination of frontage and floor area.
An introduction of property valuation
Chapter 13
Methods of valuation
There are five conventional methods of valuation: the comparative method(or comparison), the contractor's method(or summation),the residual method(or the hypothetical development method),the profits method(or the accounts method or treasury method), and the investment method(or capitalisation).
The names in brackets are those used in different countries in lieu of the traditional English names for methods,but the theory and practice remain the same wherever the methods are used.
The comparative method(Comparison)
This is probably the most widely-used method and even if one of the other four methods is used by a valuer he will still almost inevitably have recourse to comparison as well. The method entails making a valuation bt directly comparing the property under consideration with similar properties which have been sold in the past, and using the evidence of those transactions to access the value of the property under consideration.
Although this sounds simple and staightforward,there may be many pitfalls to trap the unwary.In using the method it is desirable that the comparison should be made with similar properties situated in the same area,and with transactions which have taken place in the recent past. The less the comparable property complies with these requirements,the less vaild will be the comparison.Often a valuer is able to get evidence of sales which do accord with these requirements, particularly when a valuation is of a property such as a semi-detached suburban house(a duplex). However, the more uncommon a property is,and the more specialised the type of property,The less likely is it that the valuer will be able to find good 'complete',and it is not unusual for there to be a complete lack of evidence of sales of comparable properties.
Even when properties appear to be similar,close inspection often reveals that they are in fact different.A row of apparently identical houses may on internal inspection prove to have many differences,and the skill of the valuer will be required to make an allowance in money terms for such difference in value caused by a different geographical location.
It is essntial in using this method to have as much evidence as possible readily available,and good office records are invaluable. Any valuer should ensure that there is an efficient filing system which is regularly kept up to date,and which contains as much information as can be obtained of each market transaction which is recorded.Modern computer filing systems greatly facilitate good record keeping and the almost instantaneous recall of information. However,for helpful records to be kept,there must be evidence of suitable comparables available,and unfortunately.in the real world,this is often lacking.
The word recent is a relative term. At some points in time a sale which took place a year earlier may be recent enough to be a vaild comparsion if the market has remained relatively stable in the intervening period.If the market has been volatile or has changed
in any way during this time,then market evidence might need to be much more recent for it to be a good comparable.Even if there have been no transactions in the recent past,a valuer may be able to get some guidance from considering market evidence over a period of earier years or months,as it is possible that a clearly defined trend of values might be detected.The valuer may decide that this tread would have continued through to the date on which the valuation is being done.
In using the comparable method a most thorough inspection of all the underlying factors in the market must be made in order to decide whether there have been changes in conditions since other transactions took place.For instance,changes in the general level of interest rates over a period of time may mean that what may at first appear to be useful comparable evidence has to be rejected because of the substantially different market conditions in which they occurred.
The method involves few dangers if the market is stable and active.When it is not stable,valuers may encounter problems in its use,and this may also be the case if there are few comparables,or if there are no true comparables,that is if the range of properties sold does not contain anything truly identical to the property under consideration.
Some differences may be relatively unimportant, and differences in architectural design,for example,may often make little difference to value.However,if a particular design reners a building inefficient in use,the difference may be very important,and in using the method the valuer should always consider such possibilities. The age of a building can be important in that it may be such as to render it either more or less fashionable and in may be such as to render it either more or less fashionable and in many instances the structural condition and state of repair will be directly related to the age ofthe building.Values should also pay consideration attention to the accommodation offered by different properties,and try to make allowances for variations in the amount of floor space and differences in the lay-out and the number of rooms provided.Allowance should also be made for differences in the quality of fixtures and fittings,and for differences in the size of the plots on which properties stand.Location is always very important,and the valuers should be wary of assuming that values should be similar simply because the size and accommodation of properties is identical.A slightly different location can make a vast difference to market value.
In using this method the valuer should always bear in mind the fact that property is heterogenous,and should always ask himself whether any special factors affected the market value of the comparables that he is using.or whether any special factors are likely to effect value of the property which he is considering.
The following is an example of the comparative method in use.
Example1
A valuer has to value a four-bedroom house,which provides net usable space of 180 m.Research receals that in the same street there have been sales of similar sized four-bedroom properties as fellows:
12months ago a house of 180m sold for £90000
8months ago a house of 170m sold for £86700
6months ago a house of 185m sold for £95275
3months ago a house of 175m sold for £91500
1months ago a house of 185m sold for £97600
After analysing these sales the valuer decides that whereas the first sale revealed a capital figure of £500 per m of usable space,the last sale was a figure of£527.50per m of usable space.The valuer also notices there has been a consistent rate of increase of £2.50/m per month in the capital values of this style of house and therefore values the subject property at £95400(180m @£530/m).
This is a very simple example of the comparative method in use and in reality its use will normally be more complicated.It would be necessary to check whether the various houses provided similar numbers of rooms in total,whether their locations were of equivalent quality,whether their fixtures and fittings were similar and of equal quality,and also to check on other features of each of the properties. Adjustments in the analysis of each piece of market evidence would be necessary to allow for variations in such factors, and it is likely to be rare in the world that market analysis and use of the analysed information would be as straightforward as in the example above.
There is a great danger in the use of comparable evidence that the valuer may place too much faith in it,forgetting that while such evidence reflects what happened in the past his present task is to determine what the current value of property is.Current market value may be affected by different factors to those which affected past transactions and it could therefore be that past evidence might be of only very limited assistance or in extreme circumstances it might be positively mislending.
Perpaps the biggest danger in the use of the comparative method is the underlying and simple assumption that because in the past one person was prepared to pay a certain figure for a particular property, another person will also be prepared to pay a similar figure for a similar property. It may be that the purchaser of the comparable property had special reasons and specific personal circumstances which both prompted and enabled the purachase to be made, such reasons and circumstances being completely irrelevent to others in the market place.
An example of such a situation might be a person paying a high figure to buy a house near their own for occupation by an aged or infirm parent who can contribute a substanial amount of capital towards the purchase. Other potential purchasers of nearby houses may be quite unable and also unwilling to pay a similar price.In the retailing world,a retailer selling high-value goods with big profit margins may be able to pay a high rent or a high purchase price for retail accommodation.However,if the only potentail occupiers of nearby vacant and similar retail accommodation are trades who sell low-value goods at low-profit margins,it may be completely unrealistic to anticipate a high rent or high capital value for the vacant accommodation.
The simple assumption that,all other factors being the same, the market evidence of the value of one piece of property at a point in time is automatically a good indicator of the market value of another simpilar ,itself has to be treated with great caution. The valuer has to be extremely knowledgeable about the market for which valuations are to be made,and must make every effort to determine who is looking for property of the relevant type,what their precise needs are, and what their purchasing power is, Such factors could have a great influence on how comparable evidence should be used and whether it is indeed a reliable indicator of the prices likely to be paid in the current market.
However,in spite of the need for great care in the use of the comparative method and the frequent shortage of suitable comparable evidence,it is a method which the valuer will use regularly and which will give reliable results if used property and in the correct circumstances.
The contractor¡¦s method(summation)
This is used to value the type of properties which seldom change hands and for which there are therefore few or no comparables. It must at this point be stressed that cost and value are rarely the same,but this method of valuation is based loosely on the assumption that they are related.It should be therefore be appreciated that it is a method used only infrequently,and which is something of a last resort.The basic theory of the contractor's method is that the cost of the site plus the cost of the buildings will give the value of the land and the buildings as one unit.
With the majority of properties there is ample evidence to show that this proposition is not correct,but the contractor's method id used to value properties for which there is little gerenal market demand and which are consequently rarely sold.The types of property for which it could be appropriate are hospitals,town halls,schools,libraries ,police stations,and other such buildings.although the use of the method is not necessarily restricted to the public buildings alone. Cost is normally only one factor of many which may affest supply and demand and which therefore affect value,but it is probably true that with this type of building it is a predominant factor.It would always be possible for the would-be users of such buildings to acquire alternative sities and to construct new buildings rather than purchase an existing property at a greater overall cost.Competition between rival potential users would be unlikely and it is therefore reasonable to assume that cost and value are not unrelated with such specialist buildings.
However,if an alternative building were constructed it would be a new property,whereas with an existing property it is obvious that there would be some wear and tear resulting from its previous use and there might also be a degree of obsolescence which had arisen since it was new.In using the contractor's method the valuer must therefore make a deduction to allow for both depreciation of the buildings and obsolescence of design.The basic valuation approach then becomes as below:
Cost of site plus Cost of building less Depreciation allowance and obsolescence allowance=value of existing property
This method is most frequently used for rating purposes where rates are levied on the value of buildings and sities together and it is also sometimes used in valuations for compensation when property of a specialist nature has been compulsority acquired.
The following illustrates the typical use of the contractor's method of valuation.
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