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Properties Valuation Seminar

April 10-14, 2007


UP Diliman
College of Engineering
Quezon City

Introduction

Introduction
• What is the Valuation Profession?
• What are the opportunities in the Valuation
Profession?
• How can one become a Valuer?

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Introduction
• Where has the Profession been?
• Where is it now?
• Where it will inevitably be?
• What are the tools of the trade?
• How is a dependable valuation arrived at?

The “Market Value”


Revolution

Fair Market Value


• US S & L crisis of the 80s.
• The financial crisis in Japan.
• The Asian Financial Crisis
• The Enron Fiasco.

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Demand for International
Standards
• During the past 15 years valuation for financial
reporting have moved closer to “mark-to-market”
as the basis for valuation i.e. Market Value rather
than historical cost
• Provides directors, share holders, governments,
oversight agencies and the general public a more
accurate and transparent balance sheet of public
companies

Demand for International


Standards
• As former Federal Reserve Chairman, Paul Volker, stated
in his testimony before the US House of Representatives
– Purpose of IASB is both clear and important
– Achieve a single set of high quality accounting standards that
will
• command respect around the world
• Discipline auditing approaches
• Simplify listings by national markets
• Encourage effective enforcement by national authorities

What is value generically?


• “The present worth of future benefits”
• If applied to real estate “the present value
of the future benefits that accrue to real
property ownership”
• If a commodity (real estate) is useful and
has value – how much is it worth and how
do we measure that value?

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What kind of value?
• “Value” can have many meanings
– Value to whom?
– Under what conditions?
– For what use?
– When?
• To avoid confusion valuers NEVER use
the word value alone

Market Value
• Has been the first effort of IVSC after its
inception in 1980.
• Came in handy for the IASB shift to Fair
Market Value Accounting from previous
historical cost-based accounting.
• IFRS still have some shortcomings from
Market Value perspective, but IASB has
continuing efforts with IVSC.

Market and Professional’s


Values
• Valuers distinguish between their own
personal values and those of the market
• Markets come in all shapes, sizes, and
types – valuers must be expert in
particular markets
• Valuation is like a “who dunnit”
– what’s the evidence
– what’s the answer

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Different “hats” value can wear
• Markets and common usage dictate that
many value concepts are possible:
– Market Value – we’ll define this shortly
– Other than market Value – any type of value
that does not meet the definition of market
value
• Even when used by lay persons, most
people think Market value

IVSC – IVS Standards


• Incorporated Market Value definition into
IVS 1 - Market Value Basis of Valuation
• Definition is:
– Precise
– Not expansive
– Easy to understand
– Excludes implicit assumptions or underlying theory
within definition

IVSC – IVS Standards

• IVSC – IVS 1
– Intent of each element, implicit assumptions
or underlying theory clearly and appropriately
addressed in accompanying explanatory text
– Provides:
• Clarity
• Removes ambiguity
• Transportability to different jurisdictions

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Market Value Rationale
• Must distinguish price from value
• Must establish credible and reliable basis
for market value estimate
• Must separate opinion from evidence
• Must have a concept and definition that is
understandable, relevant, reliable, and
meaningful to the marketplace

Market Value Defined


“Market Value is the estimated amount for
which a property should exchange on the date
of valuation between a willing buyer and a
willing seller in an arm’s-length transaction
after proper marketing wherein the parties
had each acted knowledgeably, prudently and
without compulsion.”

IVS 1, para. 3.1

Elements of Market Value


1. The estimated amount…
2. …a property should exchange...
3. …on the date of valuation...
4. …between a willing buyer...
5. …a willing seller...
6. …in an arm’s-length transaction...
7. …after proper marketing ...
8. …wherein the parties had each acted knowledgeably, and
prudently...
9. ...and without compulsion.

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Elements of Market Value
• “The estimated amount...
– refers to a price expressed in terms of money payable for
the Property in an arm's-length market transaction.
– Market Value is measured as the most probable price
reasonably obtainable in the market on the date of
valuation in keeping with the Market Value definition.
– It is the best price reasonably obtainable by the seller and
the most advantageous price reasonably obtainable by the
buyer.
– This estimate specifically excludes an estimated price
inflated or deflated by special terms or circumstances such
as atypical financing, sale and leaseback arrangements,
special considerations or concessions granted by anyone
associated with the sale, or any element of Special Value.

Elements of Market Value


• “...the Property should exchange..."
– refers to the fact that the value of the Property is an
estimated amount rather than a predetermined
amount or actual sale price.
– It is the price at which the market expects a
transaction that meets all other elements of the
Market Value definition should be completed on the
date of valuation.

Elements of Market Value


• "...on the date of valuation..."
– requires that the estimated Market Value is time-
specific as of a given date.
– Because markets and market conditions may
change, the estimated value may be incorrect or
inappropriate at another time.
– The valuation amount will reflect the actual market
state and circumstances as of the effective valuation
date, not as of either a past or future date.
– The definition also assumes simultaneous exchange
and completion of the contract for sale without any
variation in price that might otherwise be made.

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Elements of Market Value
• "...between a willing buyer..."
– refers to one who is motivated, but not compelled to buy.
– This buyer is neither over-eager nor determined to buy at
any price.
– This buyer is also one who purchases in accordance with
the realities of the current market, and with current market
expectations, rather than in relation to an imaginary or
hypothetical market that cannot be demonstrated or
anticipated to exist.
– The assumed buyer would not pay a higher price than the
market requires.
– The present Property owner is included among those who
constitute "the market".
– A Valuer must not make unrealistic assumptions about
market conditions nor assume a level of market value
above that which is reasonably obtainable.

Elements of Market Value


• "...a willing seller..."
– is neither an over-eager nor a forced seller, prepared
to sell at any price, nor one prepared to hold out for a
price not considered reasonable in the current
market.
– The willing seller is motivated to sell the Property at
market terms for the best price attainable in the
(open) market after proper marketing, whatever that
price may be.
– The factual circumstances of the actual Property
owner are not a part of this consideration because
the "willing seller" is a hypothetical owner.

Elements of Market Value


• "...in an arm's-length transaction..."
– is one between parties who do not have a particular
or special relationship (for example, parent and
subsidiary companies, or landlord and tenant) that
may make the price level uncharacteristic of the
market or inflated because of an element of Special
Value.
– The Market Value transaction is presumed to be
between unrelated parties, each acting
independently.

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Elements of Market Value
• ".. .after proper marketing..."
– means that the Property would be exposed to the
market in the most appropriate manner to effect its
disposal at the best price reasonably obtainable in
accordance with the Market Value definition.
– The length of exposure time may vary with market
conditions, but must be sufficient to allow the
Property to be brought to the attention of an
adequate number of potential purchasers.
– The exposure period occurs prior to the valuation
date.

Elements of Market Value


• "... wherein the parties had each acted knowledgeably
and prudently..."
– presumes that both the willing buyer and the willing seller
are reasonably informed about the nature and
characteristics of the Property, its actual and potential uses,
and the state of the market as of the date of valuation.
– Each is further presumed to act for self-interest with that
knowledge, and prudently to seek the best price for their
respective positions in the transaction.
– Prudence is assessed by referring to the state of the market
at the date of valuation, not with benefit of hindsight at some
later date.
– It is not necessarily imprudent for a seller to sell property in
a market with falling prices at a price that is lower than
previous market levels.
– In such cases, as is true for other purchase and sale
situations in markets with changing prices, the prudent
buyer or seller will act in accordance with the best market
information available at the time.

Elements of Market Value


• ". ..and without compulsion..."
– establishes that each party is motivated to
undertake the transaction, but neither is forced or
unduly coerced to complete it.

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Current IVS Status
• Market value definition recognized
worldwide
• Standards also equally recognized and
serve as national standards for some
countries
• Standards provide base for a fit to national
laws and circumstances
• Standards apply to all property types

Market Value is Universal

• Having same value definitions, concepts,


and systems:
– Reduce/eliminate misunderstanding
– Decrease fraud and intentional
misrepresentation
– Provides a value that is neutral/independent
and does not conceptually intend to favor
anyone
– Increase transparency

Market Value - Valuation


Methodologies
• No hierarchy in methodologies
• One or more methods used depending on:
– Market practice for asset type
– Quality and quantity of available data
• Disclosure in reconciliation of final
estimate about method(s) used

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Valuation Bases Other than
Market Value

IVSC – IVS Standards


• IVS 2 – Valuation Basis Other than Market
Value covers other types of value
– Inputs appear similar to Market Value but they
do not met the criteria of Market Value
– Provides users of valuations and valuers a
clear delineation between Market Value and
basis other than Market Value

Examples of Other than Market Value

• Other than Market Value types depart from


actions of the marketplace, but may have special
meaning and purpose – examples:
– Investment Value
– Going-Concern Value
– Insurable Value
• “value” must have a modifier – and a definition
and disclosure if a financial decision must be
made

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The Professional Valuer

The Professional Valuer

• A professional valuer is a person who


possesses the necessary:
– Qualifications
– Ability
– Experience
• to estimate value for a diversity of purposes

Role of the Professional Valuer


• Professional Valuers Estimate values for:
– Transactions involving property transfer
– Property considered for collateral
– Loans and mortgages
– Litigation
– Settlement on taxes
– Financial reporting

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Role of the Professional Valuer

• To be complying with IVS, Professional Valuers


must be:
– Honest
– Competent
– Free of bias
– Free of self-interest
– Not mislead
– Report in a clear manner
– Disclose all matters essential to proper understanding
of the valuation

Role of the Professional Valuer

• A valuer is a person of good repute who:


– Obtained appropriate academic qualifications
– Suitable experience and competence valuing in the market
and category of the asset
– Understands and correctly employs recognized methods and
techniques – Generally Accepted Valuation Principles (GAVP)
– Is a member of a recognized national professional body
– Pursues a program of continuing professional learning
throughout his or her career
– Follows all the requirements of the Code of Conduct

Two Rules On Standards


1. Follow the Standards.
2. If the Standards are wrong, refer to rule #
1!

Center For Appraisal Studies, 2007

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