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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Clarifying the scope of property valuation by referring to the more realistic definition of ‘the most probable price' as an improvement from the ‘market value' concept

by Kristal Amalia (ID: 845896)

In the property context, it is often debateable whether a valuer's valuation is justified. In judging the valuation, one refers to its definition. Based on the article written by J Hockley and RTM Whipple in 2009 titled “How relevant is Spencer's case 100 years on? The need for a new valuation definition: ‘the most probable price'”, this essay sheds light on what is practical for a valuer to do by referring to a more realistic definition of ‘the most probable price' as an improvement from the ‘market value' concept. It is necessary to clarify that valuation is only an opinion of a behaviour-based value. To optimise its functionality, a valuation should be built upon the available current information. A valuation should reflect the prevailing market practices and the situation of the client's problem. With finite resources, it is reasonable to present a valuation in probabilistic terms.

A valuer analyses relevant information to give an opinion of the value measured arising from the behavioural interaction between potential buyers and seller. The value measured is the agreed exchange value paid by the buyer that compensates the seller's dollar and motive objectives of selling a property. In the case of a property sale, a valuer estimates the value measured to assist a compelled buyer in determining a bid price. A compelled buyer has the purchase objective to attain productivity (the value unmeasured), which can be structurally assessed by a valuer through analysing the physical, psychological, legal, locational, and environmental components of the property. Additionally, a buyer has a personal motive to purchase a property.

It is only realistic for a valuer to estimate the value measured with regards to the existing conditions. As seen in Figure 1, the ‘market value' concept suggests the valuer to estimate the “amount for which a property should exchange” under hypothetical conditions that are unlikely to occur in the existing market (“a willing buyer and a willing seller” and “acted knowledgeably, prudently, without compulsion”). This is inconsistent with the input, which is the available information, and the use of the valuation that are both centred to market players in the existing market. As a result, this approach diminishes the functionality of a valuation as it likely results in an unrealistic estimate.

Market value

The most probable price

is the estimated amount for which a property should exchange

is the selling price which is most likely to emerge from a transaction involving the subject property

on the date of valuation

between a willing buyer and a willing seller in an arm's length transaction

after proper marketing

if it were exposed for sale in the current market for a reasonable time

wherein parties had each acted knowledgeably, prudently, without compulsion"

at terms of sale which are currently predominant for properties of the subject type."

Figure 1 Definitions of ‘market value' and ‘the most probable price'

(source: Hockley and Whipple, 2009)

A valuation should avoid uniformed behavioural assumptions on market players to be able to reflect the prevailing market practices.

(Willingness, prudent, knowledgeable, without compulsion)

A valuation is applied to the subject property if it were to be in the market in a way that is as relevant as possible to the client's defined problem. (Proper marketing, exposed for sale current reasonable, reasonable flexible to be changed)

With finite resources, the most realistic form of a valuation is to be in probabilistic terms. A valuer's finite resources make it impossible to know all behaviour-based factors (such as motivations, acquired information, and perceived negotiation strengths) that affect the offer prices of potential buyers and seller. With this uncertainty, it is impossible to provide a completely accurate estimation of the value measured. Limiting the scope of valuation with hypothetical conditions helps resolving the issue, but as explained previously, this method significantly diminishes the functionality of the valuation. To find an alternative in resolving this issue, ‘the most probable price' concept suggests a valuation to be “the selling price which is most likely to emerge” as seen in Figure 1.

[Conclusion]

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