Market information: Impact on property value appraisal

LAND economics or estate management the world over is a versatile subject embracing such diverse areas as property development and appraisal, land policy and reform, agency, property management, valuation for various purposes and so many more. Within these areas of study, it is pertinent to note that the art, science and process of valuation (value estimate) lies at the very heart of the profession of estate management.  An adequate knowledge (expertise) in this area unarguably sets the professional estate surveyors and valuers apart from other allied professionals as well as non-professionals in the field of land economics. Valuation should therefore be the central focus of an estate surveyor and valuer because it constitutes the foundation of the entire structure of property as an investment. Valuation is much like solving a mystery and, as such, requires clues which are obtained from appropriate data/information and approach.  Unlike other markets, property market is such that information or data are not readily available for processing into value estimates.

Moreover, in valuation, uncertainty increases risk and increased risk reduces appropriate value estimates due to the peculiar nature of properties.  For this reason, professional estate surveyors and valuers are trained to make objective real estate value judgments based on well analysed data/ information. Thus, to make this judgment reliable, valuers need not only theoretical knowledge, intelligence, experience, etc, but also access to necessary, reliable and representative information/data as well as appropriate valuation approaches. In the light of the above, let us look at the various methods of valuation and type of data/information required, sources and problems associated with data collection as well as availability, adequacy and accuracy of these data with focus on Nigeria and ways of improving data availability, accessibility and management for more authentic/reliable valuation and values.

Valuation being the pivot of the estate management profession should be done with a high level of professionalism.  Besides the required education, intelligence and experience, there is a need to ensure that data/information are reliable and representative in as much as these determine value estimate judgments. The process of real estate valuation is nothing but analysis of information using appropriate method. If, however, inadequate, inappropriate and wrong data are used, the end result will be inappropriate, poor value estimates which eventually impact on investment decisions. In order for estate surveyors and valuers to have a sound judgment of value estimate, there is a need for improved data availability, accessibility and management. There is a need to examine various adoptable methods of valuation, to determine required information for each method of valuation, and to examine the sources of these information and also to examine the availability, accessibility and management of these information.

The choice of one over the other varies from one property to another, statutory provisions, the purpose of the valuation, availability of required data/information as well as the Valuer expertise/experience if the opinion of value must attract credibility. Let us examine some of these methods. The contractor’s method: This is a cost approach to value.  Its application is restricted to special cases.  The valuation of such properties is derived from the value of alternative sites, including the cost of building.  The information/data required here is sale details of land within the vicinity which include sales price, location, size, the circumstances surrounding the sale, utility, etc. Also required for the estimate of value of the improvement is the present cost of construction per meter square of different types of construction which would have included the direct and indirect cost, overheads, contractor’s profit etc. as well as depreciation factor. Direct comparison approach: This method involves producing a value estimate for the property being appraised by comparison, that is, comparing it with similar properties which have been sold, or which asking or offering prices are known.  In applying this method, the following are required namely: location, construction details, age and condition, layout, design, utility and desirability. The sales price of property adjudged to be most comparable, tend to set a range within which the value of the subject property will fall making necessary adjustment.

Investment method: In the property market, ownership and occupation are two separate things.  In many cases, properties are occupied under contract whereby the occupier pays certain sum of money to the owner normally referred to as rent, in return for the right to occupy.  Thus, the owner surrenders occupation for certain period in return for money (rent). The translation of this net income (rent) into value by capitalisation is termed investment approach. The basic principle is that an investor wishes to invest capital to obtain an annual return (rent) which represents an acceptable rate of return on the capital.  The rate chosen should be reflective of the quantity and duration of the income stream and be sufficient to attract capital to that particular investment.The rate of return, interest rate, initial capital, year purchase are all relevant to this approach. Data and information: Data is not synonymous with information but the two words are often used as if they mean the same thing in common parlance. Data are signs, facts, figures and abstract things, which on their own are useless until they are processed.  A great deal of data can exist in files of an organization without making much sense to anybody.  Thus, data are collected facts and figures (raw materials) from which information is created.  Data could either be useful or not. Information on the other hand,technically means processed, meaningful and useful data.

The output of the data transformation process constitutes information only if one can extract meaning from it.

Thus, data is raw symbol or figure pertaining to the routine activities of any organization or person.  These themselves do not enable decisions of any consequence to be taken except it is “processed”, i.e. made meaningful to provide necessary information.

Processing is thus, the conversion of data into information, i.e. turning useless data into useful facts and figures.  Usually large amount of data is ‘distilled’ into small amount of information. There are some qualities good information must possess to enhance decision making. It must be brief – to avoid neglecting vital facts; It must be accurate so that decisions made based on the information may be effective and efficient; It must be up to date to prevent obsolete decisions; It should promote effective action and It must be gotten from a reliable source The major source of information relating to valuation is the physical inspection of the subject matter of valuation itself from where first-hand information are obtained.  This is the primary source of information.  However, there are other general information/data derived from the forces originating outside a property which affect property value. Organizations files are the most obvious source to which Valuers should immediately turn for necessary information to solve any problem at hand.  Once these data are well developed and organized.  It saves time tremendously.  In building up these files, the Valuer should normally make recourse to the other sources and have regular systematic arrangement for obtaining new information to bring the file up to date.

A great deal of information/data required by Valuers are also available in published form. Such publications as professional journals, costs and market price indices, business journals, Central Bank of Nigeria and other banks publications, government gazettes, daily newspapers etc. Certain information/data which could help to improve the regional and neighborhoods analysis of property valuation can also be obtained from such Ministries as Works and Transport, Lands & Housing, Information as well as parastatals such as Housing Corporations, Property Development Corporations, Federal Mortgage Bank, Planning Authorities etc.  The category of information/data that can be obtained include among others, deed recordings, mortgage recordings, foreclosure, building permits, local regulation and assessments, registration of titles, stamping of lease agreements, cost per meter square etc. Information can also be sourced from private sources.  Many at times, these information might be confidential and thus a privilege to get them.  Examples of such are research studies of colleges and universities, non-governmental organizations, brokers and estate surveyors, banks and savings institutions, civil and building construction firms etc. However, sources of information/data cannot be exhausted, information/data used in valuation analysis must be valid and authoritative, indication of apparent facts might not be sufficient. Continued verification of information/data as they are gathered eliminates improper conclusions. The subject of management: The principles of management cannot be presented as a simple set of rules.  There are so many facets of life in which management is involved and thus can over simplify the complex problems inherent in management.

Many definitions of management have been given but one that appears to explain its best for the purpose of this write up is defined as “The science of organization and operation, or at the practical level, the act of directing and conducting affairs” (Michael Thorncroft 1965).

It is largely a matter of adjusting to changing condition and thus giving opportunities for measurement, analysis and experiment which provide the basis of scientific evidence.  Since management entails the use of imagination and judgment, it also could be claimed to be an art.  Nevertheless, the application of scientific techniques has brought precision to many aspects of management.

However, management is best understood as “a process: a continuous series of actions carried on in a definite manner towards better approach to valuation”.  It is unarguably discovered that there is a lamentable lack of accurate and timely data/information on property transactions.  The valuer judgment is required not only for physical and economic factors of the subject property but also for comparable properties.    It is unfortunate that there has been no distinction between data (abstract information elements) and information (processed and distilled data) Due to the lack of proper, adequate, timely and sometimes non availability of necessary property transaction information.  Valuers are in difficulties in providing accurate or rational valuation opinion of properties whose comparable are in short supply. Implication: Professional Estate Surveyors and Valuers evolved in the market economy to make real estate value judgments.  In making these judgments, the Valuer needs not only the acquired skill, experience, intelligence etc. but also access to the necessary price and market information/data.  The real challenge is to minimize the uncertainty surrounding market values through representative data/information failing which there will be serious implication on valuation accuracy, integrity and credibility of Valuers opinion.

In the light of the above, the amount of reliable information goes a long way to determine the rationality and accuracy of value judgment.  The implication is that poor information gives poor value, whilst sound information gives sound value judgment.

• Olutola, an associate member of The Nigerian Institution of Estate Surveyors and Valuers, works with Globacom Ltd.

YOU SHOULD NOT MISS THESE FROM NIGERIAN TRIBUNE

Revealed! Details Of South-West APC Leaders Meeting With Presidential Aspirants

US: Three dead in Iowa church shooting following Biden gun speech

MORE revelations have emerged about Friday’s meeting held by South-West leaders of the All Progressives Congress (APC) with aspirants from the zone, whose main objective, was on how to avert a crisis that will create a fractured party as it prepares for primary on May 30 and 31, Sunday Tribune has reliably gathered…

Supreme Court Has Cleared Civil Servants To Participate In Politics, Falana Tells FG

NIGERIAN workers are constitutionally-free to participate in politics, lawyer, Mr Femi Falana has said. He was responding to the warning from the central government to civil servants to stay off politics…

Battle For New Alaafin Begins As Ruling Houses Insist On Producing Next Oba

US: Three dead in Iowa church shooting following Biden gun speech