Advanced Issues in Property Valuation

Hans Lind is professor of real estate economics, retired from the Royal Institute of Technology, KTH, Stockholm, Sweden. He currently works as a consultant, lecturer, and writer on housing and real estate issues.Bo Nordlund, PhD, is Founder and Owner of BREC-Bo Nordlund Real Estate Consulting AB, a firm that provides valuation and accounting services for real estate organizations. He is also Senior Lecturer at Karlstads University, Karlstad, Sweden.

• 1. Introduction 51.1 The general purpose of the book 51.2 Overview of issues covered 61.3 How the book can be used 72. The concept of market value 92.1 Introduction 92.2 Standard definition 92.3 Criteria for a good definition: clear, measurable, concise and relevant 102.4 Problem 1. "Estimated price" or "most probable price"? 112.5 Problem 2: Shall the definition refer to a competitive market? 122.6 Problem 3: Should the definition refer to prudent and knowledgeable actors? 122.7 Problem 4: Should the definition include a reference to willing seller and willing buyer? 142.8 Problem 5: Market value and turnover 152.9 Highest and best use 182.10 Conclusion 18Exercises 193. Finding the market value: What is a valuation method and how should the methods be categorized? 203.1 Introduction and overview 203.2 The three classic valuation approaches/methods 203.3 A problem with the standard classifications 243.4 The information base of a valuation 263.5 A different way to classify valuation methods 293.6 Adjustment methods 323.7 Why are regression analysis (hedonic methods) seldom used in ordinary valuations? 333.8 What is really the cash-flow method? 353.9 Valuation of development properties and option aspects 383.10 Use of different methods in the valuation of a specific object: Concluding comments 40Exercises 424. Uncertainty and bias in property valuations 444.1 Introduction 444.2 Valuation variance: Why do valuers disagree? 454.3 Valuation accuracy: Why do the observed price differ from the market value? 464.4 How confident is the valuer in the estimated market value? 484.5 How stable is the estimated market value? 494.6 Client influence and bias 514.7 Behavioural factors 524.8 Valuation smoothing 544.9 How self-selection can lead to "bias" 554.10 Possible policy recommendations 574.11 Concluding comments 58Exercises 595. Valuation for lending purposes and long-term value concepts 605.1 Introduction 605.2 Two competing theories about predictability of property prices 615.3 Price bubbles on the real estate market 625.4 The leverage cycles and bank incentives 635.5 Use market value, make risk analysis and adjust the Loan-to-value ratio (LTV-ratio) 645.6 “Long-run value” as an alternative 675.7 Alternative value concept (1) Mortgage Lending Value 685.8 Alternative value concept (2) Worth or (normalized) investment value 705.9 Derivatives of market value 715.10 Cost based value concepts 735.11 Final comment: Can valuation methods and credit rules affect the property cycle? 73Exercises 746. Valuation for financial reports and other accounting related issues 756.1 Introduction 756.2 The fair value concept 766.3 The fair value hierarchy, disclosure requirements and the risk for bias 786.4 Valuation of public sector properties 806.5 Property depreciation, refurbishments, and free cash flows to the property firm 816.6 Auditing and quality assurance of fair values in financial reporting 826.7 Concluding comments about fair values 83Exercises 847. Property valuation and sustainable buildings 877.1 Introduction 877.2 What is a green/sustainable building – on environmental certification system 877.3 How sustainability can affect property values 897.4 Valuation methods and sustainable buildings 917.5 The relation between values of "green" and "brown" buildings 927.6 Concluding comments 94Exercises 948. Transparency issues 968.1 Transparent and rational markets 968.2 Transparent valuation reports 1018.3 Concluding comments 103Exercises 1039. Valuation ethics, the role of the valuer and governance 1049.1 The importance of valuation and basic ethical rules 1049.2 The responsibility of valuers and valuation firms 1049.3 Authorization/certification of valuers 1079.4 Concluding comments 109Exercises 11010. Property valuation in the future 11110.1 Technological development 11110.2 Structural changes in society: Corona-pandemic as an example 11310.3 Radical uncertainty and property valuation 114Exercises 115Appendix: Can the value of a property be divided into value of the parts? 117Introduction 117Dividing the value into land value and building value for homes and commercial buildings 117Dividing the value into farmland and farm buildings 119Dividing the value into property value and "business enterprise value" 120Concluding comment 121Exercises 121References 122