Exploring property types and their valuation challenges: a theoretical perspective Property Valuation(ULPV 5407) Presentation 01 Prepared by: 1. Habtamu M. ID No. GSR/0537/16 2. Melat G. ID No. GSR/7711/16 Property • Property is anything (items or attributes/tangible or intangible) that can be owned by a person or entity. • Based on its use property can be categorized as; - residential, - commercial, - industrial, - agricultural and - unique properties • Property valuation is a complex and dynamic process that involve assessing the worth of different types of real estate properties depending on various factors. • Each property type presents unique characteristics and challenges that influence its valuation. 1. Residential Properties • is a property zoned specifically for living or dwelling for individuals or households; it may include standalone single-family dwellings to large, multi-unit apartment buildings. • it is usually valued based on the sales comparison approach. • This process is simplest where there is sales evidence of properties in the same location of a similar style and size. • The challenge comes where, - The property is not typical for the area or - There are few or no comparable nearby. • A residential valuation is generally calculated based on comparable evidence. To challenge a valuation, you must provide three solid comparable properties: - Location (Within a reasonable distance of the property (usually within half a mile). - size (Of a similar type to the subject property) and - condition of the property (No more than six months old) 2. Commercial Properties • Commercial property is real estate that is used for business activities. • The valuation of commercial properties is influenced by factors like; - location, - rental income potential, - tenant occupancy rates, and - market demand. • Assessing the value of commercial properties is complex due to varying lease terms, tenant quality, and market trends. • This statement became a serious matter to the landlord of commercial building as far as financial institution which characterized by; - inappropriate data (cash flow), - hidden issues and - coerced by landlord on value of properties, • These lead to big challenges in conducting an assessment for valuation of commercial properties using income approach as suitable and agreed method for income generating properties. • future cash flows are not accurately predicted, The discount rate assumption relies on the market for competing investments at the time of analysis, which would likely change, over time. • Straight line assumptions about income increasing over certain years are generally based upon historic increase in market rent but never factors the cyclical nature of many real estate markets • Terminal value usually represents larger percentage of the total DCF valuation. • To conduct valuation for commercial it requires enough data on DCF. Valuation methods such as the property's potential growth income, collection and vacancy rate, maintenance and operating cost, and the capitalization rate, are commonly used for commercial properties. 3. Industrial Properties • This include manufacturing facilities, distribution centers, warehouses and others. • Valuing industrial properties can be challenging as their worth is often tied to specific industries or businesses. Factors that affect their valuation includes; - infrastructure, - proximity to transportation networks, and - zoning regulations • Specialized expertise is required to assess the value of industrial properties accurately. • It has been discovered that valuers in practice encounter some challenges. Some of the challenges include, - inter alia, - unavailability of up-To-date data on construction costs, - Inadequate data for calculation of depreciation (where cost of construction or historic cost is known). • The above mentioned problems have led to numerous assumptions which can render a value opinion inaccurate and unreliable. 4. Agricultural Properties • It includes any real property for which it’s present or post- remediation use is for growing agricultural crops for food or feed either as harvested crops, cover crops or as pasture. • Some challenges in valuation of agricultural property is usually peculiar because valuers are not always familiar with such property especially the operations of farm. • The main challenge to value agricultural properties include; - Inaccurate data presented by the farm operators/owners. - Unwillingness of farm owners/operators to volunteer accurate information with respect to sale and profit made from the farm proceed. - Unwillingness on the part of farm owners/operators to present invoices in case machineries and plants purchased. - Valuers inexperience of farm operations and management leading to poor access to knowledge and judgment on the things to value. - Absence of evidence on recent information sales/let of similar property. - Absence of data base for information on Agricultural property 5. Unique properties (Special-Design Property) • It is limited market property with a unique physical design, special construction materials, or a layout. • It is its unique design that restricts its utility to the use for which it was built. • The basic goal of unique property valuation is to provide a measure of the utility (the satisfaction from properties) uses or service. • Unique properties, such as historical buildings, custom designed homes, and properties with unconventional features, pose distinct valuation difficulties that go beyond the standard approaches used for more common properties. key challenges faced in valuing unique properties, • Lack of Comparable Properties Unlike conventional properties, which can be compared to similar properties in the same area, unique properties often have features that set them apart. This lack of comparable properties can make it difficult to establish a baseline value and can lead to a higher degree of subjectivity in the valuation process. • Specialized Features and Maintenance Costs Unique properties often come with specialized features, historical significance, or unconventional designs. Valuing these features accurately requires expertise in understanding their contribution to the property's value. Moreover, maintenance costs for unique features can be significantly higher compared to standard properties. Valuers must consider not only the initial construction cost but also ongoing expenses for maintenance and potential restoration. • Fluctuating Demand The demand for unique properties can be more volatile than for traditional properties. Trends in architectural preferences, historical appreciation, and shifts in societal values can influence the demand for unique properties. Valuers need to stay attuned to these fluctuations to accurately assess a property's value, especially in a market where demand changes can be swift and unpredictable. • Limited Appraisal Data Conventional appraisal methods often rely on extensive databases of past sales to establish property values. However, unique properties, by definition, have limited comparable data available. This limitation can hinder the application of standard appraisal approaches, necessitating more creative valuation methods that consider a broader range of factors, such as cultural significance, artistic value, and potential for adaptive reuse. • Legal and Zoning Complexities Unique properties, particularly historic or architecturally significant ones, may be subject to various legal restrictions and zoning regulations that can impact their value. These restrictions might limit the ways the property can be used or modified, influencing its market appeal and overall worth. Valuers must have a comprehensive understanding of these complexities to accurately assess a property's value within the bounds of legal and regulatory constraints. • Appraiser Expertise Valuing unique properties requires a specialized skill set that goes beyond standard real estate appraisal practices. Appraisers need to possess in-depth knowledge of architecture, design, historical context, and local market dynamics. Finding appraisers with the right expertise can be challenging, and even then, the subjective nature of unique property valuation means that different appraisers might arrive at different conclusions. THANK YOU!
