OK.... Here is a quick recap so far
To estimate value of property:-
1. First you find out the purpose of valuation
2. This determines the basis of valuation. Our focus is on joint venture deals and the two relevant bases of valuation for JV are :-
a. Bases that reflect the prices at which parties can reasonably agree to either acquire or dispose their property.
b. Bases that reflect benefits derivable from owning landed property such as Value-in-Use and Investment Value.
Based on the information gathered, you need to select a method/model to deploy for the valuation.
The models commonly used are:-
· Cost/Contractors Method: Used for specialised properties that are not readily available on the market. ·
- Profits/Accounts Method: Used to determine the value of properties used for trading, but with very limited record of transaction on them, such properties as hotels and restaurants are valued using this technique.
- Investment/Income Method: This method of valuation is best suited to income producing properties such as commercial or residential properties that produce cash flows in form of rents. It is used to realise an estimated capital value by capitalizing the income flow derivable from the property.
- Comparison Method: This model is used in cases where there is ample evidence of previous transactions on similar properties. It is considered the most reliable and widely used method provided there is abundant evidence of recent transactions on comparable properties. The method considers market prices recently paid for comparable properties with adjustment made to reflect the peculiar conditions and utility of the property being valued.
- Residual Method/Development Method: This method is adopted in the valuation of development properties, that is bare land or developed land with potential to be developed/redeveloped/renovated for a higher and better use. It helps determine the price of land relative to the cost of development and works on the premise that the value of a site in its present condition as far as a developer is concerned is equivalent to the value of the proposed project at completion (Gross Development Value) less all costs/expenses incurred to bring about the development and the developer’s profit.
This of course involves the estimation of total cost of development and value of the project at completion as well as making reasonable allowances for profit and contingency. Accuracy, therefore – and this is applicable to other methods discussed – depends largely on the good application of techniques and the knowledge/expertise of the valuer.
It should be noted that, apart from these approaches to valuation, a valuer’s intuition also comes to play in the valuation of property, a lot of assumptions are involved in the process, although there are reasonable ranges within which such assumption must be made.
Because our aim is to carry out a quick valuation estimate to guide a JV negotiation, the most appropriate method we recommend because it’s easy to execute is the comparison method. Thanks to various property platforms like www. www.nigeriapropertycentre.com and www.propertypro.ng it’s relatively easy to do a quick search for similar properties online to get an idea of how much they sell for. Just note that most of the prices listed on these sites are still discounted when they are actually sold. We have found that taking and average of the property prices and discounting by about 15-20% usually gives you a fair idea of value. With this knowledge, you can come up with an estimate for land value pending when a professional is engaged if negotiations are favourable.
In my opinion, the residual method/development method is a great way to value a property, particularly for Joint venture projects. The challenge is that it takes a bit more expertise and understanding to use this method. If you want me to dig deeper and send you a guide on this method, just reply this email.
I personally enjoyed sharing this. I hope it was informative and useful