THE PROPERTY VALUATION PROCESS - IMPROVEMENT SUGGESTIONS
The paper shows how easy it is to manipulate real estate values while claiming to be compliant with valuation standards. Selecting the right set of comparable transactions seems to have by far the greatest impact on the valuation – but rules and recommendations on how to do this are lacking. Two main types of valuation error – Adjustment error and Missing data error are discussed. The research is based on real cases and factual available data which are generally incomplete and inaccurate. Suggestions are proposed on how to increase the quality and reliability of valuations. These suggestions could be used as a basis for amending valuation standards in future.
EXAMPLE OF DEVELOPMENT PROPERTY VALUATION USING MONTE CARLO METHOD
Professional workshop, 28.11.2023
COMPARABLE SELECTION AND ADJUSTMENTS IN REAL ESTATE VALUATION
Summary: The paper deals with the issue of selecting comparable transactions and implementing adjustments in real estate valuation. The selection of comparable transactions (and the implementation of adjustments) has by far the greatest impact on the valuation. Valuation standards are very general and vague on this topic and allow the valuer a lot of freedom in estimating the value. This can result in very large differences in valuation, especially for valuations of less liquid real estate. The paper presents approaches and guidelines for the comparable selection and the adjustments process, which were developed primarily for the needs of mass valuation models and can also be very useful for individual real estate valuations. By using the presented methods and visual display of the results, we can significantly increase the quality of the valuation and the comprehensibility and traceability of the valuation process for the end user of the valuation report. Key words: real estate valuations, comparable selection, comparable adjustments
SIR*IUS – Journal of The Slovenian Institute of Auditors, 3/2023
THE CHALLENGE OF REAL ESTATE VALUATION FOR SECURED LENDING
Summary: The paper deals with prevailing challenges of real estate valuations. Real estate, heterogenous and diverse in nature, are characterized by a wide variance of selling prices which cannot be statistically fully explained. This makes it difficult to objectively evaluate a property. The selection of the right set of comparable transactions (and the implementation of adjustments) has therefore by far the greatest impact on the valuation. And loose valuation standards do not provide much guidance. Real estate valuations might be therefore subject of high uncertainty. In addition, valuation bias may even increase valuation imperfections. A reviewer of a valuation reports must be therefore aware of all pitfalls and know how to challenge a report in the right way.
Bančni vestnik – Journal of The Bank Association of Slovenia., 11/2023
The_Challenge_of_Valuation.pdf
SURVEY – USER SATISFACTION OF REAL ESTATE VALUATIONS REPORTS
Summary: The article discusses the results of the survey on the satisfaction of users of real estate valuation reports. The survey was conducted in cooperation with the Slovenian Institute of Auditors and RE / MAX Commercial. Various users of valuation reports were invited to participate: banks, auditors, buyers and sellers of real estate, bankruptcy trustees and others who regularly use real estate valuation reports in their work. Most users are satisfied with the reports, especially with the methods, calculations, comprehensibility, format and conclusions of the reports used. Criticisms most often refer to the independence of valuers and the related (too) large influence of the client on the valuer and (too) large differences in the valuations for the same property. For the average user, the most important is short delivery time of the report and that the values are in line with their expectations. Key words: Real estate valuations, Real estate valuation report, User Satisfaction, Survey
SIR*IUS – Journal of The Slovenian Institute of Auditors, 1/2022
BIAS IN REAL ESTATE VALUATION
Summary: The paper deals with the problem of bias in real estate valuation. Due to poor market liquidity, lack of market data and the heterogeneity and specificity of real estates, real estate valuation is particularly susceptible to the effects of behavioral bias. We examined and analyzed the available papers and research works that point out the risk of bias in real estate valuation, and suggested some possible solutions. We mainly focused on the bias of anchoring in valuation, in which the valuer anchored his valuation around the reference value, which is a psychological anchor, from which the valuer cannot easily move away during the valuation. This paper also discusses the risk of the client's influence on the valuation report, which has an impact on the valuer's impartiality. In the second part of the paper, some possible solutions are proposed to reduce or prevent bias in real estate valuation. Key words: valuation of real estates, valuation bias, anchored value, client's influence on valuer
SIR*IUS – Journal of The Slovenian Institute of Auditors, 3/2021
APPLICATION OF STATISTICAL METHODS AND ERROR ESTIMATION IN REAL ESTATE VALUATION
Summary: The paper discusses the use of statistical methods, especially multiple linear regression, in estimating the value of real estates. The method is suitable for determining the dependence of a set of independent variables and a dependent variable, and can be very useful in estimating the value of real estates. By using this method, we can significantly reduce subjectivity in estimating the value. We can also use statistical methods to estimate an error in the estimated value of a real estate, which, unfortunately, is always present due to the heterogeneous nature of real estates. In this paper, we apply an Excel software tool to show the procedure for calculating the value estimate and the error in valuation of a commercial real estate valued by using the market approach and the income approach. Key words: multiple linear regression, error estimation
SIR*IUS – Journal of The Slovenian Institute of Auditors, 1/2021
MONTE CARLO SIMULATION FOR REAL ESTATE VALUATION
Summary: The article discusses the use of the Monte Carlo method in assessing the value of real estate. The method is widely used in valuing financial assets and investments, but rarely used in real estate valuation. Appling Monte Carlo allows investigating all the uncertainties in the real estate valuation process and, consequently, provides to the user higher quality information about the subject property. The result of the Monte Carl is not a single property value, but a set of possible values from at least to the most probable values. The spread of values gives an important insight on the reliability of the valuation. In this paper, a comparison of the valuation process of an undeveloped land plot is presented, where the ordinary (land residual technique) and Monte Carlo methods are compared. The values are calculated using the spreadsheet software Excel. Shown are also the advantages of using the Monte Carlo method in real estate valuations. Key words: real estate valuation, Monte Carlo simulation, land residual technique.
SIR*IUS – Journal of The Slovenian Institute of Auditors, 3/2019
