HOW MUCH IS A PROPERTY WORTH?
The value of a piece of real estate can be determined by many methods, but buyers should begin by asking themselves three key questions
‘How much is the property worth?” This is a question most people have when making a real estate decision. Buyers want to know what price is reasonable for properties offered in the market, especially those that they want to purchase. Sellers want to make sure the price they are asking for the property is neither understated nor overstated. Lenders want to know how much they should lend to the borrower for a property he offers as collateral for a loan. These are the most common real estate scenarios these days.
Market value is the most sought-after detail taken into account by all the parties involved in a property transaction. Among the many bases used in the value measurement are investment value, fair value, forced-sale value and depreciated replacement cost.
According to the International Valuation Standards Committee, market value is “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”.
Market comparison, or sales comparison, is one of the standard methods used in assessing a property’s market value.
Although market comparison is a straightforward method, the lack of “good comparables” can make it a complicated process. Admittedly, the vital information — property transactions used as comparables — is hardly as elaborate as that of trading records in the stock exchange or of car sales data in the second-hand automobile market.
The problems valuers face are twofold. First, it is hard to find similar property transactions that can be reasonably compared (an apples-to-apples comparison), even though property transactions are completed somewhere every day. Second, similar property transactions may occur at different periods of time and thus may be no longer comparable because of changing market conditions or environment.
To address the issue of having only a small number of transactions and low comparability among these transactions, valuers may seek to answer three questions before they arrive at a market value conclusion:
1. What is the property good for? To answer this question, it is essential to know what land uses are or are not allowed by the rules and regulations in a particular area. Because of different physical characteristics — such as narrow frontage of the property or a narrow road that the property fronts — some land plots may not be able to benefit from the same legal allowance granted to other plots in the same area. For instance, a site with road frontage of less than 30 metres may not be able to accommodate a high-rise development. A piece of land in a green zone may not be used for expansion of an existing factory.
To determine whether two or more properties are comparable, three major factors must be considered: size, location and use.
A development plot of 25 rai in a residential area along Rama IX Road could hardly be a direct comparable to a 100-square-wah (400 square metres) plot in a soi nearby. The former is likely to be used for housing development by a developer, and the latter by people looking for land on which to build a single house.
Although the two plots may be allowed for the same use — housing development — their sizes may determine the potential buyers. The price per square wah that the developer would want to pay may be only one-third of the price paid by the buyer of the smaller housing plot.
Likewise, a 25-rai land plot on a main highway in the same area would be a sought-after property among developers with retail development capability. Retail developers would likely make the best offer for this property, given the plot’s size and location, compared to their peers in sectors such as residential development.
2. Who could the potential buyers be? The answer to this question will normally emerge when the most probable use has been identified as per the example above.
3. How much are they willing to pay? The first two questions should be explored before attempts to answer the third question are made. This third question can be addressed using a valuation exercise comprising one or more methodologies.
The most common methods used for valuation include: market or sales comparison approach; cost approach; income approach; and residual method. The method used would normally reflect what potential buyers consider while they are figuring out the amount they are willing to pay.
For example, to estimate the value of development land suitable for housing, the housing developer will estimate: the gross development value; the construction cost; and the marketing, financing, taxes and profits needed to develop the project. The excess amount of sales over all the costs and profits is called land residual, which is considered to be the amount that should be paid to the land owner. The residual method could be used as a primary or secondary method, depending on the information and situation at the time of the valuation.
Having said all that, valuation is required not only when a seller or a buyer wants to know at what price the real estate asset could possibly be sold, or when a homebuyer needs a mortgage loan. It serves many other purposes which may require different valuation methods and lead to a lot more questions to explore beyond the three raised in this article.
Apibarn Ariyakulkarn, FRICS, is a RICS (Royal Institution of Chartered Surveyors) registered valuer and an adviser to the valuation division at JLL Thailand. For more insights, readers can reach him by email: Apibarn.Ariyakulkarn@ap.jll.com or visit www.jll.co.th