Assessment History: Past, Present, and Future

1. Roots of Valuation: The Past

• Before professional standards and regulatory bodies, valuation relied heavily on personal experience and business acumen, practiced informally by traders and landowners with local market knowledge.
• Taxation and real estate ownership played a pivotal role in developing early valuation methods. The need to determine fair value for land and properties for tax purposes led to simple valuation techniques.
• In ancient times, civilizations used methods to value land and resources, often for estimating spoils or imposing taxes. For example, in ancient Rome, there were records of land and its value for tax purposes.
• Early economic theories, such as Adam Smith’s labor theory of value, which focused on production cost as a basis for value, began to influence the concept of value.

2. Modern Valuation: The Present

• The 20th century saw significant development in the valuation profession, with the emergence of professional bodies and standardized standards, enhancing credibility and transparency.
• International Valuation Standards (IVS) were developed to standardize practices and ensure quality across borders, defining principles and procedures for valuers to follow.

• Modern valuation methods include three main approaches:

  1. Sales Comparison Approach: Compares the subject property to similar properties recently sold in the same area. Sale prices of comparable properties are adjusted to reflect differences.
     • Formula: Estimated Value = Sale Price of Comparable ± Adjustments (size, location, condition, etc.)
  2. Cost Approach: Estimates the cost to replace the property with a similar asset, considering depreciation. Used especially for new or specialized properties.
     • Formula: Estimated Value = New Replacement Cost - Accumulated Depreciation + Land Value
  3. Income Approach: Used for income-generating properties. Relies on estimating the property’s Net Operating Income (NOI) and dividing it by the Capitalization Rate (Cap Rate).
     • Formula: Estimated Value = Net Operating Income (NOI) / Capitalization Rate (Cap Rate)
     • The valuer must understand the purpose of the valuation, which affects the methodology and data collected/analyzed. For example, valuation for mortgage purposes may focus on potential resale value, while valuation for investment purposes may focus on expected income.
  • Example: For property tax, the assessed value may be less than the actual market value. If a home buyer relies on this same assessment, they may incur significant loss if the purchase price is much higher. The valuer should clearly state that the assessment is only for the intended use by the client and cannot be used for any other purpose or by any other user.

  • A distinction must be made between the Report Date and the Valuation Date. The Valuation Date is the date the value was estimated, usually the date of the valuer’s inspection of the property. The Report Date is the date the valuer issues the final report. These dates may not be the same.

  • Example: A valuer may inspect a property on January 15, 2024❓ (Valuation Date) but issue the final report on January 25, 2024 (Report Date).

  • The valuer must clearly define the Assumptions and Limiting Conditions upon which the valuation relies. Assumptions are facts the valuer assumes to be true without independent verification. Limiting Conditions are restrictions that affect the scope of the valuation.

  • Example: The valuer may assume the property title is sound and marketable, the property use complies with zoning laws, and there are no hidden conditions affecting the property’s value.

  • The valuer can use Extraordinary Assumptions and Hypothetical Conditions if necessary. An Extraordinary Assumption relates to a specific assignment, and if found to be false, it would alter the valuer’s opinion of value. A Hypothetical Condition is contrary to what exists but is supposed for the purpose of the individual assignment.

  • Example: A valuer may be asked to determine the value of a hundred-unit apartment building five years from now. The apartment building has not been built yet, although plans and specifications exist, and the investor currently owns the land upon which it will be built. In this case, the building is a hypothetical condition for the assignment (it does not actually exist). Analysis of future conditions, such as market conditions, demographic changes, and economic trends, relies on extraordinary assumptions.

3. The Future of Valuation

• Technology is expected to play an increasingly important role. Using Big Data and advanced analytics can improve accuracy and reduce reliance on subjective estimates.
• Artificial Intelligence (AI) and Machine Learning can be used to analyze large amounts of real estate data and identify patterns and trends that may not be apparent to human valuers, helping improve accuracy and reduce errors.
• Automated Valuation Models (AVMs) are becoming increasingly common, especially in simple residential valuations. However, these models should be used with caution, as they rely on historical data and may not accurately reflect current market conditions.
• There is increasing interest in sustainable and green properties, requiring valuers to develop new skills to assess these properties, considering energy and water efficiency, sustainable materials, and the property’s environmental impact.

• The valuation profession faces several future challenges, including:

  • Climate Change: Can affect property values, especially those exposed to floods, storms, and rising sea levels.
  • Demographic Changes: Can affect the demand for different types of properties.
  • Economic Fluctuations: Can affect property prices and value.
  • Continuous professional development is essential for valuers to succeed in the future, staying informed of the latest technologies, standards, and practices in the profession.