Arcachon
14-03-14, 23:31
Translated by Pearl Lim (aka Susan Teo)
May 28, 2013
By: Zhui Meng (追夢)
For the majority of people, they do not consider housing valuation as a hassle as it has become a standard procedure in housing transactions. Indeed buyers of resale HDB (Housing Development Board) flats, private homes, shop spaces and offices are often the ordinary men on the street who will not make an effort to understand valuation. Seen in another way, this demonstrates the high level of trust professional valuers command.
For the case of a resale HDB flat, valuation has to be conducted by a HDB-approved valuer and it has a 3-month validity period. These type of houses are commonly valuated through comparison. As HDB flats are highly similar hence differentiating features are their locations (i.e. mature estates, suburbans, new estates), the level of the unit, its orientation, age, obstruction, transport accessibility, and the availability of nearby amenities like malls and schools. But I think, buyers themselves will make a valuation only that it will not be accepted by the authorities either because they are not qualified valuers or are not licensed.
Comparative valuation works by comparing the unit to be valuated with other units that have similar type, location, design, layout, age, level. Of course, there is also the transacted price comparison (the transacted price depends on the buyer's preference, housing location and age, which the valuer has to take into account.).
The substitution principle is crucial in a valuation. If a house cannot be used as a substitution it cannot be used for comparison. So just what is this substitution principle? It means that if you cannot buy this unit, you will be able to buy a largely similar one. An analogy would be hotel rooms, if you were dis-satisfied with an allocated room, you would be able to change to another satisfactory one at the same price.
However, a house is unique, hence it is unlikely you will be able to find an exactly identical one. Housing is a special commodity that possesses the attribute of being vastly different due to a slight dissimilarity. This is especially true for retail spaces. Perhaps you may recall formerly the row of HDB shops behind Redhill MRT: two fruit stalls were located there. Both sold a wide variety of fruits at competitive prices and business was booming. Both shops face the entrance of the MRT station with one directly opposite it while the other was a short distance away. The after-office hours were the busiest times for the shops with customers mostly making up of MRT passengers and residents of the area. It was even common for people working in the Jurong industrial area to call relatives and friends to buy fruits from the stalls and pick the fruits up on their homeward train journey. The fruits and money were exchanged at the gantry of the station, without the passengers even having to exit the station.
Out of curiosity, every time I passed the area I would drive to the fruit stalls and see the situation for myself while buying some fruits. I discovered that the stall directly opposite the MRT entrance enjoyed a booming business; whereas the other saw lackluster sales and even had to dangle discounts. Why was there a disparity in sale? Poor service? High prices? Limited variety of fruits? No! None of these reasons. It was because of the slight difference in location. In commercial properties, the distance to traffic flow, entrance and nearby commercial activities of a shop unit, is measured in inch. As they say every inch of land is invaluable. The two fruit stalls have similar size, variety of fruits and prices, but sales was vastly different. Such cases can be found everywhere if you look closely enough. If a valuer has to appraise both shops how will he go about doing it? Of course, he will have to consider all these factors. For HDB flats the valuations need not be so stringent, but disparity in value due to small differences cannot be avoided.
In the 1990s, I once gave a three consecutive half-day talks about real estate development and management to a group of senior cadres from China. At that time, China was still in the early days of its economic reform and the housing estate market was in its infancy. Most cadres were unfamiliar with the dynamics in the housing estate market.
In the talk, I came up with a hypothetical situation. I had two exactly identical units in two distinct locations (In other words, both units are clones of each other. I presented this situation to illustrate comparative law) – Zone A and Zone B. In the former, because of the strong neighborliness and harmonious relationships the residents did not want to move and stay put for more than three decades. In Zone B, while liveable, the area saw more changes in ownerships as a result the community spirit was not as strong. After 30 years, if you were an owner in Zone B how would you value an identical house in Zone A and Zone B? Is the house in Zone A better or in Zone B? Hazard a guess, what is your answer?
Virtually all of the cadres gave the answer as Zone A. Their reasoning was that because Zone A was more liveable since most residents there did not want to move. What is your answer? Is it the same? Actually from a purely living point of view, Zone A is preferable. However, it is a different story for the pricing mechanism in the residential property market. Zone A has no record of transactions for referencing whereas Zone B has plenty. Thus in Zone B, one can make out the housing price movements and appreciation. Obviously, even without a valuer one can estimate the value of the house from past transactions – pricing it at or above the last transaction. In Zone A, however, one can only reference the price 30 years ago; hence if you hope to price the house as high as that in Zone B buyers may not accept it. For a valuer to make a valuation of a house in Zone A using comparison becomes difficult; whereas using cost method is unrealistic. Of course, this is only a hypothetical case study.
In today's world, the valuer will compare the house in Zone A with that in Zone B as they share similar characteristics. Looking back now, that example was not completely realistic but served the purpose of illustrating a concept which the students could also understand.
I am someone who loves to put the cart before the horse, and digress before discussing about valuation by market comparison. I think, this way, it will be easier to enter the topic. Now, let's discuss the market comparison approach based on the principles, methods and adjustments of the collected information and data.
Definition 1 (Note 1):
The market comparison approach makes use of a recently transacted price of a similar unit and after some correction present the estimated value of the unit.
Definition 2 (Note 2):
The market comparison approach for the valuation of a house relies on the recent transacted price of a comparable unit. Both units will then be compared and the appropriate price correction will be made for the valuation.
Definition 3 (Note 3):
Market comparison approach: Makes use of the transacted price or valuation of a property with similar characteristics and uses to the property that is being valuated. The conditions of the two properties are then compared and each characteristic quantified to obtain the accurate value of the property. This method is practical, accurate and transparent. When similar properties are easily found this method yields more accurate results.
These three very similar definitions have fully explained the principles and methods behind the market comparison approach. Now, we are left with the adjustments of the collected information and data.
While the three definitions are very similar, there is a point that I do not concur with, especially that stated in Definition 3 (Note 3), which is “this method yields more accurate results”. This is because the market comparison approach utilises transacted prices or other available valuations to base the estimate on. Hence during a property boom, these numbers are artificially inflated and do not reveal the true value of the property. Basing the valuation on such inflated figures will yield an unrealistically high valuation. How then can it be accurate? In my view, accurate means being able to reflect the inherent value of the property.
Among our readers, I believe there are some who still remember in the 1970s and 80s before the British withdrew from Singapore, in Clementi's Sunset Estate there were high-end apartments and terrace apartments measuring six thousands square feet. Each unit could fetch $500,000-$600,000 (an extremely high price during that time) and yield between $3,500-$4,000 in monthly rental. Some well-heeled folks decided to buy three units at one go, and use the rental of the first unit to pay for the instalment of the second unit, the rental of the second unit to pay for the third unit. Unexpectedly, after the British withdrew the property market fell into a slump and the luxurious apartment that could command $500,000-$600,000 previously fell in value to $280,000-$320,000. Rental also followed suit and dropped to about $800 per month. Yet nobody felt surprise over the rapid fluctuation in values. That is why I believe that property valuations should be based on natural price appreciation (like market movements, economic growth, rise in national income levels such that Singaporeans can afford better quality housing) so that it can truly reflect the value of a property. This valuation will be more accurate, stable and high.
The principles behind the market comparison approach has been repeated numerous times above, and does not need any further explanation. So now, let me briefly explain the range of applications and data adjustments related to the market comparison approach.
We know that all valuation methods have their suitable area of usage. I explain some below:
The market comparison approach should be applied in markets with active transactions. Examples would be resale HDB flats, upmarket residences, office spaces and shops. Whether the home is for owner-occupancy, investment to earn rental, or even flipping the market comparison approach is most commonly used. As I said, this approach comes with certain risks of inflated values. Still properties which are bought at a high are sold at high prices too, in the end consumers are the ones who will suffer. Valuations are professional if done properly and diligently, but the transacted price still remain a matter between the buyers and sellers. Valuation is also an art and science that depends on the individual valuers' experience and knowledge as a result it is normal for valuations to vary.
When banks provide mortgages they also rely on market comparison approach. In repossession auctions, the lowest valuation is used. If you have a house for sale or wish to buy one, choosing a qualified valuer is an art. The valuer must fully understand the purpose of the valuation, collect all the necessary information and data before conducting the analysis to determine the valuation. Auctions usually can command a good price; this explains why banks are fond of using this method in repossession cases.
This essay attempts to offer a simple introduction to the common issues about the market comparison approach, and does not explain in detail its applications. The opinions expressed here are for reference only and I welcome any feedback.
http://www.stproperty.sg/articles-property/financial-guide/how-is-your-home-valuated-an-introduction-to-housing-valuation-by-market-comparison-approach-a-translation/a/120613
May 28, 2013
By: Zhui Meng (追夢)
For the majority of people, they do not consider housing valuation as a hassle as it has become a standard procedure in housing transactions. Indeed buyers of resale HDB (Housing Development Board) flats, private homes, shop spaces and offices are often the ordinary men on the street who will not make an effort to understand valuation. Seen in another way, this demonstrates the high level of trust professional valuers command.
For the case of a resale HDB flat, valuation has to be conducted by a HDB-approved valuer and it has a 3-month validity period. These type of houses are commonly valuated through comparison. As HDB flats are highly similar hence differentiating features are their locations (i.e. mature estates, suburbans, new estates), the level of the unit, its orientation, age, obstruction, transport accessibility, and the availability of nearby amenities like malls and schools. But I think, buyers themselves will make a valuation only that it will not be accepted by the authorities either because they are not qualified valuers or are not licensed.
Comparative valuation works by comparing the unit to be valuated with other units that have similar type, location, design, layout, age, level. Of course, there is also the transacted price comparison (the transacted price depends on the buyer's preference, housing location and age, which the valuer has to take into account.).
The substitution principle is crucial in a valuation. If a house cannot be used as a substitution it cannot be used for comparison. So just what is this substitution principle? It means that if you cannot buy this unit, you will be able to buy a largely similar one. An analogy would be hotel rooms, if you were dis-satisfied with an allocated room, you would be able to change to another satisfactory one at the same price.
However, a house is unique, hence it is unlikely you will be able to find an exactly identical one. Housing is a special commodity that possesses the attribute of being vastly different due to a slight dissimilarity. This is especially true for retail spaces. Perhaps you may recall formerly the row of HDB shops behind Redhill MRT: two fruit stalls were located there. Both sold a wide variety of fruits at competitive prices and business was booming. Both shops face the entrance of the MRT station with one directly opposite it while the other was a short distance away. The after-office hours were the busiest times for the shops with customers mostly making up of MRT passengers and residents of the area. It was even common for people working in the Jurong industrial area to call relatives and friends to buy fruits from the stalls and pick the fruits up on their homeward train journey. The fruits and money were exchanged at the gantry of the station, without the passengers even having to exit the station.
Out of curiosity, every time I passed the area I would drive to the fruit stalls and see the situation for myself while buying some fruits. I discovered that the stall directly opposite the MRT entrance enjoyed a booming business; whereas the other saw lackluster sales and even had to dangle discounts. Why was there a disparity in sale? Poor service? High prices? Limited variety of fruits? No! None of these reasons. It was because of the slight difference in location. In commercial properties, the distance to traffic flow, entrance and nearby commercial activities of a shop unit, is measured in inch. As they say every inch of land is invaluable. The two fruit stalls have similar size, variety of fruits and prices, but sales was vastly different. Such cases can be found everywhere if you look closely enough. If a valuer has to appraise both shops how will he go about doing it? Of course, he will have to consider all these factors. For HDB flats the valuations need not be so stringent, but disparity in value due to small differences cannot be avoided.
In the 1990s, I once gave a three consecutive half-day talks about real estate development and management to a group of senior cadres from China. At that time, China was still in the early days of its economic reform and the housing estate market was in its infancy. Most cadres were unfamiliar with the dynamics in the housing estate market.
In the talk, I came up with a hypothetical situation. I had two exactly identical units in two distinct locations (In other words, both units are clones of each other. I presented this situation to illustrate comparative law) – Zone A and Zone B. In the former, because of the strong neighborliness and harmonious relationships the residents did not want to move and stay put for more than three decades. In Zone B, while liveable, the area saw more changes in ownerships as a result the community spirit was not as strong. After 30 years, if you were an owner in Zone B how would you value an identical house in Zone A and Zone B? Is the house in Zone A better or in Zone B? Hazard a guess, what is your answer?
Virtually all of the cadres gave the answer as Zone A. Their reasoning was that because Zone A was more liveable since most residents there did not want to move. What is your answer? Is it the same? Actually from a purely living point of view, Zone A is preferable. However, it is a different story for the pricing mechanism in the residential property market. Zone A has no record of transactions for referencing whereas Zone B has plenty. Thus in Zone B, one can make out the housing price movements and appreciation. Obviously, even without a valuer one can estimate the value of the house from past transactions – pricing it at or above the last transaction. In Zone A, however, one can only reference the price 30 years ago; hence if you hope to price the house as high as that in Zone B buyers may not accept it. For a valuer to make a valuation of a house in Zone A using comparison becomes difficult; whereas using cost method is unrealistic. Of course, this is only a hypothetical case study.
In today's world, the valuer will compare the house in Zone A with that in Zone B as they share similar characteristics. Looking back now, that example was not completely realistic but served the purpose of illustrating a concept which the students could also understand.
I am someone who loves to put the cart before the horse, and digress before discussing about valuation by market comparison. I think, this way, it will be easier to enter the topic. Now, let's discuss the market comparison approach based on the principles, methods and adjustments of the collected information and data.
Definition 1 (Note 1):
The market comparison approach makes use of a recently transacted price of a similar unit and after some correction present the estimated value of the unit.
Definition 2 (Note 2):
The market comparison approach for the valuation of a house relies on the recent transacted price of a comparable unit. Both units will then be compared and the appropriate price correction will be made for the valuation.
Definition 3 (Note 3):
Market comparison approach: Makes use of the transacted price or valuation of a property with similar characteristics and uses to the property that is being valuated. The conditions of the two properties are then compared and each characteristic quantified to obtain the accurate value of the property. This method is practical, accurate and transparent. When similar properties are easily found this method yields more accurate results.
These three very similar definitions have fully explained the principles and methods behind the market comparison approach. Now, we are left with the adjustments of the collected information and data.
While the three definitions are very similar, there is a point that I do not concur with, especially that stated in Definition 3 (Note 3), which is “this method yields more accurate results”. This is because the market comparison approach utilises transacted prices or other available valuations to base the estimate on. Hence during a property boom, these numbers are artificially inflated and do not reveal the true value of the property. Basing the valuation on such inflated figures will yield an unrealistically high valuation. How then can it be accurate? In my view, accurate means being able to reflect the inherent value of the property.
Among our readers, I believe there are some who still remember in the 1970s and 80s before the British withdrew from Singapore, in Clementi's Sunset Estate there were high-end apartments and terrace apartments measuring six thousands square feet. Each unit could fetch $500,000-$600,000 (an extremely high price during that time) and yield between $3,500-$4,000 in monthly rental. Some well-heeled folks decided to buy three units at one go, and use the rental of the first unit to pay for the instalment of the second unit, the rental of the second unit to pay for the third unit. Unexpectedly, after the British withdrew the property market fell into a slump and the luxurious apartment that could command $500,000-$600,000 previously fell in value to $280,000-$320,000. Rental also followed suit and dropped to about $800 per month. Yet nobody felt surprise over the rapid fluctuation in values. That is why I believe that property valuations should be based on natural price appreciation (like market movements, economic growth, rise in national income levels such that Singaporeans can afford better quality housing) so that it can truly reflect the value of a property. This valuation will be more accurate, stable and high.
The principles behind the market comparison approach has been repeated numerous times above, and does not need any further explanation. So now, let me briefly explain the range of applications and data adjustments related to the market comparison approach.
We know that all valuation methods have their suitable area of usage. I explain some below:
The market comparison approach should be applied in markets with active transactions. Examples would be resale HDB flats, upmarket residences, office spaces and shops. Whether the home is for owner-occupancy, investment to earn rental, or even flipping the market comparison approach is most commonly used. As I said, this approach comes with certain risks of inflated values. Still properties which are bought at a high are sold at high prices too, in the end consumers are the ones who will suffer. Valuations are professional if done properly and diligently, but the transacted price still remain a matter between the buyers and sellers. Valuation is also an art and science that depends on the individual valuers' experience and knowledge as a result it is normal for valuations to vary.
When banks provide mortgages they also rely on market comparison approach. In repossession auctions, the lowest valuation is used. If you have a house for sale or wish to buy one, choosing a qualified valuer is an art. The valuer must fully understand the purpose of the valuation, collect all the necessary information and data before conducting the analysis to determine the valuation. Auctions usually can command a good price; this explains why banks are fond of using this method in repossession cases.
This essay attempts to offer a simple introduction to the common issues about the market comparison approach, and does not explain in detail its applications. The opinions expressed here are for reference only and I welcome any feedback.
http://www.stproperty.sg/articles-property/financial-guide/how-is-your-home-valuated-an-introduction-to-housing-valuation-by-market-comparison-approach-a-translation/a/120613