UNIQUE PROPERTY VALUATION

Course objectives
At the end of this chapter you should be able to:
 Understand the definition and concepts of unique property

 Explain the nature and characteristics of unique property

 Describe different types of unique property valuation

techniques
 Show the procedures of different valuation techniques of
unique property
 Unit one and two: Introduction
• Unique property is “A limited market property with a
unique physical design, special construction materials,
or a layout that restricts its utility to the use for which
it was built (also known as Special-Design Property).”

• A Limited-Market Property defined as :“A property

that has relatively few potential buyers at a particular
time, sometimes because of unique design features or
changing market conditions.  Many limited-market
properties include structures with unique designs,
special construction materials, or layouts that restrict
their utility to the use for which they were originally
built. 
 Nature of unique properties
 There is no little or no comparable evidence.
 Value of goods depends on their utility and
rarity
 Purpose, type and age of properties determine
which technique to employ & how to estimate
the value of properties
 They are seldom sold properties
 They have intangible benefit which could be
difficult to measured in financial term.
 Types of unique properties
• Depending on the type and use ,properties are divided
in to two as non specialized(common) and
specialized(unique):
• For common properties there exists sufficient
transaction activity so the market value is determined
by using the market data as an input.
• Where as specialized properties do not transact
sufficiently so the value of those properties determined
by the nature and underlying essentials of property by
using cost, income and sales comparison approach.
• Unique properties divided as historical or cultural,
public, religious, machinery and equipment and
environmental.
 Valuation process
• It is a systematic procedure used by appraiser to
provide answers to the client question about
value and value related issues.
• It start with identifying the appraisal
assignment
• The goal of the valuation process is to produce a
well supported opinion of value of asset being
appraised
• The appraiser has considered all factor that
affect the value of the asset being appraised, and
the process follow the following steps:
 Cont’d…
1. The appraisal assignment(defining problem): identify
the intended use of appraisal, the type and use of the
property, identify the client etc.
2. Collect relevant data: Gather all relevant data from
primary and secondary sources.
3. Apply appropriate valuation methodology: identify
and apply one of the three convectional valuation
method. The appraiser must consider each approach
and why those not used were omitted.
4. Formulate value: the appraise give monetary value
for the property.
5. Prepare appraisal report: the facts, reasoning and
methodology used to arrive at valuation should be
organized and reported for the responsible organ.
Valuation techniques for unique properties
• There are generally three internationally
accepted property valuation methods they
are sales comparisons, income capitalization
and cost approach.
• However, these convectional valuation
techniques may not capture the monetary
measures of intangible benefits and unique
properties.
• In this case other valuation methods like the
contingent valuation method(CVM) widely
implemented in cost benefit analysis.
 Cont’d…
A) Cost approach
 The cost method is the most applicable
method to know the monetary value of
unique properties.
 Its economic rational for the cost method is
a rational person will not pay more for the
existing properties than it would cost to buy
the land and to build a new building.
 It calculate the replacement or reproduction
cost for the improvement that have been
made to the land.
 Cont’d

• Mathematically, the method can be stated as

Cost of new building

- deprecation
= capital value of building
+ value of land
= Value of property
 Replacement or Reproduction cost
• Replacement cost is the current cost of similar new
property having the nearest equivalent utility as the
property being appraised. It includes the cost and
overhead that would be incurred in constructing an
improvement having the same utility as the original.

• Reproduction cost is the current cost of reproducing a

new replica of the property being appraised using the
same material.

• Reproduction cost including material, labor, and

overhead(operating cost), that would be incurred in
constructing an improvement having exactly the same
characteristics as the original improvement
 The concept of depreciation
• Deprecation is the difference in value between an
existing old property and new property taken as
standard of comparison.
• Generally, there are three types of depreciation:
A)Physical deprecation
It is caused by wear and tear on the property from use.
1. Curable physical deterioration:
Applies to items in need of repair on the effective
appraisal date. It occurs when the value added by a
repair equals or exceeds the cost to cure the defect.
 Cont’d…
2. Incurable physical deterioration

 Physical deterioration that cannot be

practically or economically corrected at
present. It occurs when the value added by the
repair is less than the cost to cure.
B. Functional obsolescence

 It is the loss in utility and value due to a

reduction in the desirability of the property.
 Cont’d…

C. External (economic) obsolescence

 External obsolescence is a loss in value caused by
negative influences outside of the subject property.
 Economic obsolescence may be caused by reduced
demand for the property, the increased
competition, change in the raw material supplies,
increased cost of raw material and labour.
1. Sales comparison (market) approach
•The method compare the subject property with
comparable properties (i.e. similar properties) that have
sold recently.

•The economic principle of substitution implies that the

value of the subject property is determined by the price
that the market participants would pay to acquire a
substitute property of similar utility and desirability.

•Theoretically, no adjustments to the sale prices of the

comparable properties would be needed if the site,
building, and location characteristics of the comparable
properties were identical to the subject property, and if the
transactional details were the same.
 Cont’d
• However, the real estate market is imperfect-
no two properties are exactly alike, and
various aspects of transactions may vary
greatly.
• Hence, to estimate the market value of a
subject property, appraisers make explicit
adjustments – additions & subtractions – to and
from the sale prices of comparable properties
• Then the appraiser evaluates the final adjusted
sale prices of the comparable properties into a
single indicated value for the subject property
 Cont’d…

• Comparable sale data – comparable sales are

investigated and required data on each comparable
transactions like information on the property’s physical
characteristics, legal status and other information are
collected from public records, private companies and
Multiple listing services.
• There is no specific number of comparables that is right
for every appraisal assignment. Three or more sales data
are considered depending on the circumstances.
• Adjustments to comparable property transaction
prices – when employing the sales approach, appraisers
must consider numerous adjustments divided into two
categories: transactional and property adjustments.
 Cont’d…

• The goal of these adjustments is to convert each

comparable sale transaction into an
approximation of the subject property.
• If the comparable property is inferior to the
subject property with respect to valuable
characteristics the comparable property’s sale
price would be adjusted upward.
• Conversely, if the comparable property is
superior to the subject property along any
important dimension, the comparable property’s
sale price would be adjusted downward.
 Cont’d…

• Transactional adjustments- concern the nature

and terms of the deal w/c influences the bargaining
position or motivation of buyer, seller, or both can
affect the negotiated price, regardless of the
physical, economical & locational characteristics of
the property.
• Property adjustments- recognize locational
physical, & economical difference between
properties, plus the ways that the properties are
used & the presence or absence of personal
property, all can add or subtract incrementally to a
base value, much like the effect of options on the
price of a car.
Approach Applicability Limitation

Sales Sufficient, recent, reliable Difficult to apply

comparison transactions exist when insufficient
Stbale market number of
Transaction data readily transactions.
available Difficult to apply
when rapidly changing
economic conditions
and legislations
When the property
has special features or
a unique design,
comparable data may
be difficult to find
 Procedure
1. Research the market for sales
2. Verify information per the scope of work.
3. Select relevant units of comparison.
4. Look for relevant differences in the comparable
properties and adjust the difference .
5. Reconcile the value conclusions into a single
point opinion or range.
 Cont’d

C) The income approach

• The method is applied to estimate the value of
unique properties if the property generate
periodical income.
• The economic rationale of the income approach
for existing properties is that no investor will pay
more for a property than he/she will retrieve by
holding the property.
• There are two recognized approaches to value a
property using the income method:
- Income capitalization(yield method)
- Discounted cash flow(DCF)
 Cont’d…
 Yield or income capitalization method:- It depend on
forward looking capitalization of net operating
income for first year.
Value = NOI
Initial yield
 The discounted cash flow method: is built on the
present value of net operating income during a
specific estimation period as well as present value
estimation of a residual value at the termination of the
property life period.
 Cont’d…

Steps in the income approach:

1. Research the income and expense data of the subject
property.
2.Estimate the Potential gross income (PGI)) the property is
capable of producing. As if full and without collection
losses
3. Estimate typical vacancy and collection losses
4. Subtract vacancy and collection losses from gross income
to arrive at the effective gross income
 Cont’d…

5. Estimate annual expenses and subtract them from the

effective gross income to calculate the net operating
income (NOI)
6. Analyze comparable investments to arrive at a
capitalization rate and method appropriate for the
subject property
7. Once we determine NOI, The appraiser can apply one
of the methods of income capitalization to generate an
estimated value of the subject property.