Real Estate Appraisal: a Review of Valuation Methods

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PRACTICE BRIEFING

Real estate appraisal: a review of valuation methods
School of Electrical and Computer Engineering, National Technical University of Athens, Athens, Greece School of Rural and Surveying Engineering, National Technical University of Athens, Athens, Greece, and Jonathan Edwards Consulting, University of Reading, UK Keywords Market surveys, Real estate, Forecasting, Estimation, Assets valuation Abstract The valuation of real estate is a central tenet for all businesses. Land and property are factors of production and, as with any other asset, the value of the land flows from the use to which it is put, and that in turn is dependent upon the demand (and supply) for the product that is produced. Valuation, in its simplest form, is the determination of the amount for which the property will transact on a particular date. However, there is a wide range of purposes for which valuations are required. These range from valuations for purchase and sale, transfer, tax assessment, expropriation, inheritance or estate settlement, investment and financing. The objective of the paper is to provide a brief overview of the methods used in real estate valuation. Valuation methods can be grouped as traditional and advanced. The traditional methods are regression models, comparable, cost, income, profit and contractor's method. The advanced methods are ANNs, hedonic pricing method, spatial analysis methods, fuzzy logic and ARIMA models.

Practice briefing: Real estate appraisal 383

Elli Pagourtzi and Vassilis Assimakopoulos Thomas Hatzichristos

Nick French

Introduction Real property is defined as all the interests, benefits, rights and encumbrances inherent in the ownership of physical real estate, where real estate is the land together with all improvements that are permanently affixed to it and all appurtenances associated thereto. The valuation of real estate is therefore required to provide a quantitive measure of the benefit and liabilities accruing from the ownership of the real estate. Valuations are required, and often carried out, by a number of different players in the marketplace. These may include: . real estate agents; . appraisers; . assessors; . mortgage lenders; . brokers; . property developers;

Journal of Property Investment & Finance Vol. 21 No. 4, 2003 pp. 383-401 # MCB UP Limited 1463-578X DOI 10.1108/14635780310483656

JPIF 21,4

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investors and fund managers; lenders; market researchers and analysts; shopping centre owners and operators; and other specialists and consultants.

This paper aims to examine the valuation of real estate prices, using prediction strategy based on selection of the best fitting model for use. The objective of the paper is to review the various methods used in real estate valuation. The role of valuation For any valuation to have validity it must produce an accurate estimate of the market price of the property. The model should therefore reflect the market culture and conditions at the time of the valuation. It should be remembered that the model should be a representation of the underlying fundamentals of the market. Thus, in the property market, what is often called a ``valuation'' is the best estimate of the trading price of the building. In this context, the following convention is adopted: . price is the actual exchange price in the marketplace; . market value is an estimation of that price were the property to be sold in the market; and . calculation of worth is used to assess the inherent worth to the individual or group of individuals. In many property markets it is commonplace for the ownership of property to be separate from its use. Often the price of exchange will be the same whether the purchaser...
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