Valuation Principles
Valuation Principles tests whether you can define value precisely, select the right approach and defend an opinion with evidence. Expect questions on market value, highest and best use, the valuation process, reconciliation and the difference between value, price, cost and worth.
Core definitions
Market value is the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, where each acted knowledgeably, prudently and without compulsion. Price is what a transaction achieved; cost is what construction or acquisition consumed; worth is value to a particular owner or investor. They are not interchangeable.
Highest and best use is the reasonably probable use that is legally permissible, physically possible, financially feasible and maximally productive. It may be the existing use or a redevelopment option, but only where the option is more than speculative.
Worked example
A comparable sold for $900,000. The subject lacks the comparable's garage, worth $30,000; the sale settled six months ago and local values have risen 2%, adding $18,000; the comparable's larger site is superior by $20,000. Indicated value = $900,000 − $30,000 + $18,000 − $20,000 = $868,000. Explain each adjustment and avoid double-counting market movement already reflected in a sale price.
Traps
- Treating asking price or rateable value as market evidence.
- Ignoring the valuation date and using later sales without adjustment.
- Calling a cost figure value without depreciation or obsolescence.
- Asserting highest and best use without testing legality, feasibility and productivity.
- Reconciling by averaging approaches without explaining the weight given.