What is a Valuation?

The word "Valuation" is widely used and often substituted with other words like appraisal, sale price estimate, assessment, selling range, opinion.  There are online tools, apps and mathematical programs that can, for a small fee, provide an estimate of a property's value.  Real estate agents are often ready to provide a free "estimate of value" or an "appraisal" on the prospect of a future sales commission.

In this context the wider community may not understand what a Valuer does or why their services are required when seemingly the same service can be obtained at much less cost or for free.  The Australian Property Institute (API) seek to clearly and concisely articulate what constitutes a "Valuation".

This paper is not a technical guide on how to value an asset, but it seeks to establish a common understanding that can be promoted and used to educate the public about what a valuation is in the API's opinion.  It describes the valuation process and is focused on a full valuation, rather than contemplating the other types of restricted valuations that API Valuer members also undertake (e.g. valuations for rating & taxation purposes, and restricted assessments).;

A Valuation is:

"an established, ethical and evidence based process for assessing the monetary value of an asset at a specified date, that is legally defensible and undertaken by a qualified, professional Valuer."

The term Value is defined as:

The quantity of one asset that can be obtained in exchange for another usually expressed in monetary terms.  The value of an object is generally considered to be equal to the present value of the future benefits arriving out of ownership or use.

In this instance, the asset is freehold or leasehold property, plant and machinery and businesses. Valuations may be required for a variety of purposes such as mortgage security, financial reporting, compulsory acquisition and rating and taxation.

Value may have various definitions such as market value, fair value, indemnity value, market value in accordance with statutory requirements or assumptions. However, the one most often quoted and used for real estate purposes in Australia is Market Value which   paraphrases the key elements of the High Court case of Spencer v the Commonwealth 1907. Market Value is defined by the International Valuation Standards Committee (IVSC) and has    been adopted by the Australian Property Institute (API) Inc. as:

“the estimated amount for which an asset or liability 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.”

 

The process which a qualified Valuer adopts to assess value may vary, according to the nature of the asset and the appropriate basis of the valuation, will include:

  • receipt of written instructions which identify the interest to be valued;
  • a clear understanding of the purpose for which the valuation is being prepared, e.g. mortgage security, financial reporting, rating & taxation according to statutory requirements; etc.
  • the effective date of the valuation;
  • assessing the appropriate method of valuation reflecting the highest & best use of the asset, (unless a specific basis of valuation is applicable);
  • choose the appropriate approach which include market, income and cost approaches and the methodologies within each approach;
  • in the case of real property collection of all information and documentation, including title and lease information, outgoings (if applicable), rates certificates, town planning controls, building plans;
  • inspection of the asset;
  • research and analysis of sales and leasing transactions and also investigation into the asset’s physical and legal attributes and applicable macro and micro market conditions;
  • analysis of all data, including sales and leasing transactions;
  • where possible, inspection of comparable assets forming the relevant evidence used in the analysis;
  • application of the data to the selected methodologies and the subject asset; and
  • preparation of a written report embodying the above and generally providing the rationale followed and analytical processes undertaken in carrying out the valuation, the meaningful information used in the analysis such as sales and/or leasing evidence and the methodology adopted to utilise the results of the analysis to arrive at the opinion of value.

A valuation report provides an assessment or opinion of the value of an asset and should be prepared by an appropriately qualified Valuer.  A professional Valuer will provide a written report.

The nature of the report, its content and length will vary according to the needs or instructions of the instructing part, legal requirements and the type and complexity of the asset.

A Qualified Property Valuer:

In Australia, a Property Professional who is certified or accredited by the Australian Property Institute as having the appropriate academic qualification and practical experience and who has the applicable Professional Indemnity Insurance and is bound by the API Code of Professional Conduct.

The above will be adopted by the API and included in the Australian Valuation and Property Standards, Glossary of Terms and in relevant promotion materials.

For enquiries please contact standards@api.org.au