Service life is the calendar duration of operation of structural elements and the building as a whole, subject to the implementation of maintenance and repair measures.
For trouble-free use of the building, it is necessary to periodically replace (or restore) some structural elements and systems of engineering equipment (for example, floors, wooden floors, water supply systems, etc.). Compliance with the rules of technical operation decisively determines the fulfillment of the standard service life of structural elements and the building as a whole. For example, a steel roof is designed to last 15 years, provided that it is painted every 3-5 years. Violation of this rule shortens the service life of a steel roof by half.
Wear and tear of buildings and structures means that individual structures, equipment and the building as a whole gradually lose their original qualities and strength. Determining the service life of structural elements is a very complex task, since the result depends on a large number of factors contributing to wear. Therefore, the standard service life of buildings depends on the material of the main structures and is averaged. The current standards (Tables 1 and 2) provide for a different number of capital groups for industrial (4 classes), public (9 groups) and residential buildings (6 groups).
Table 1. Classification of residential buildings by capital
| Group of buildings | Characteristics of the building and structural elements | Service life of the building, years |
| I | The buildings are stone, especially capital ones; foundations - stone and concrete; walls - stone (brick) and large blocks; floors - reinforced concrete | 150 |
| II | The buildings are stone, ordinary; foundations - stone; walls - stone (brick), large-block and large-panel; ceilings - reinforced concrete or mixed, as well as stone vaults on metal beams | 125 |
| III | The buildings are stone, lightweight; stone and concrete foundations; lightweight masonry walls made of brick, cinder blocks, shell rock; wooden, reinforced concrete or stone ceilings on metal beams | 100 |
| V | Prefabricated panels, frame, adobe, adobe, half-timbered buildings; foundations - on wooden chairs with rubble pillars; walls - frame, etc.; ceilings - wooden | 30 |
| VI | Buildings made of frame-reeds, boards and other lightweight ones | 15 |
Table 2. Classification of public buildings by capital
| Group of buildings | Type of buildings, materials of foundations, walls, ceilings | Service life of the building, years |
| I | Frame buildings, with reinforced concrete or metal frames, with the frame filled with stone materials | 175 |
| II | The buildings are especially capital, with stone walls made of piece stones or large blocks; columns and pillars - reinforced concrete or brick; ceilings - reinforced concrete or stone vaults on metal beams | 150 |
| III | Buildings with stone walls made of piece stones or large blocks; columns and pillars - reinforced concrete or brick; ceilings - reinforced concrete or stone vaults on metal beams | 125 |
| IV | Buildings with lightweight (stone) masonry walls; columns and pillars - reinforced concrete; ceilings - wooden | 100 |
| V | Buildings with lightweight masonry walls; columns and pillars - brick or wood; ceilings - wooden | 80 |
| VI | The buildings are wooden; walls - logs or paving stones | 50 |
| VII | Wooden frame and panel buildings | 25 |
| VIII | Lightweight buildings | 15 |
| IX | Tents, pavilions, stalls and other lightweight trade buildings | 10 |
The first capital group of residential buildings includes stone buildings, especially capital buildings (stone and concrete foundations; brick, large-block and large-panel walls; reinforced concrete floors), the standard service life of such buildings is 150 years. The introduction of structural elements into a building made from materials with a shorter service life leads to a reduction in the standard service life of the building as a whole. Thus, prefabricated panel, frame, half-timbered buildings with wooden floors (fifth capital group) have a service life of 30 years. The last (sixth) capital group includes lightweight buildings with a service life of 15 years. The standard service life of a building is determined by the predominance of certain structural elements in it that have different service lives:
- concrete foundations 100-125 years
- brick and large-panel walls 125 years
- reinforced concrete floors 100-125 years
- wooden floors 60 years
- 80 years old ceramic tile floors
- parquet floors 50 years
- plank floors 30-40 years
- wooden rafters and sheathing 50 years
- ceramic tile roofing 80 years
- roofing made of asbestos-cement sheets 30 years
- windows and doors in external walls 40 years
- elements of engineering equipment systems (valves, valves, pipes, etc.) 10-20 years
The service life of a building depends both on operating conditions and on the strategic choices of designers. You can build a relatively cheap building, but during its entire service life you will have to incur significant costs to maintain it in acceptable technical condition. Or you can erect a building in which practically no maintenance or repairs will be required during its entire service life, but the cost of such a facility will be disproportionately higher compared to the reasonable costs of technical operation.
Physical (material, technical) wear and tear of a structural element or building means the loss of its original technical properties under the influence of various factors. Over time, the strength of materials and the stability of structural elements decrease, the heat- and sound-insulating, water- and air-permeable qualities of enclosing structures deteriorate, and individual elements wear out and rust.
Table 3. Assessment of the technical condition of building structures depending on their physical wear and tear
The accuracy of determining the physical deterioration of a building depends on the approach used and ranges from 1% (based on engineering surveys and laboratory studies) to 5% (based on survey results using simple instruments). The amount of physical wear of a particular structural element is determined using special tables, including signs of wear and the corresponding ranges of values and wear. The physical deterioration of the entire building is defined as the arithmetic average of the depreciation of individual structural elements, weighed by their specific weights in the total replacement cost of the object.
Obsolescence should be understood as the inconsistency of a building with its functional purpose, which arises as a result of changing social demands. In relation to residential buildings, we are talking about the inconsistency of architectural and planning solutions with modern requirements, about overcrowding of buildings, about an insufficient level of improvement and landscaping of the territory, about outdated engineering equipment.
There are two forms of obsolescence:
1st form - a decrease in the cost of construction work as their cost decreases (due to changes in the scale of construction production, growth in labor productivity, etc.);
2nd form - depreciation of a building as a result of a discrepancy between its parameters and the changed requirements of society.
This refers to the following negative qualities of the building:
a) planning defects (presence of walk-through rooms, small area of kitchens and auxiliary rooms, inconvenient location of bathrooms, a large number of small rooms and their inconvenient location, etc.);
b) non-compliance of the building’s structural elements with modern requirements (unsatisfactory thermal characteristics, sound insulation, waterproofing, etc.);
c) absence or unsatisfactory quality of elements of the building’s engineering equipment (electricity, water and gas supply, elevators, air conditioners, etc.).
There are two main ways to quantify obsolescence of the second form: technical-economic and sociological. The technical and economic assessment method is a system of indicators compiled on the basis of a generalization of the unit cost of structural elements and engineering equipment of various buildings, expressed as a percentage of the replacement cost of the building. The value of such indicators needs regular adjustments. The method of sociological assessment of the second form of obsolescence is based on the analysis of the processes of exchange and purchase and sale of housing. For example, in the process of exchanging more comfortable housing, the owner receives compensation in the form of additional living space. Obsolescence manifests itself in an even more clear form in real estate assessments.
From the point of view of the functional operation of real estate objects, it is customary to distinguish several types of life spans. There are economic life periods that define a specific period of time in which real estate can be used as a source of profit. Such terms end when improvements made to the property cease to contribute to the value of the building. There is actually a lifetime of a property, that is, a period of time when the building exists and is suitable for living or working. In typical physical life span, which is determined by various regulations, the following subtypes of terms are distinguished. Effective age, which reflects the age of the object, depending on the exterior and technical characteristics. Chronological age, which corresponds to the time the building is in operation. Remaining economic life, which is used for the purpose of appraising a building by an appraiser, is calculated by the period from the date of the appraisal itself to the end of the economic life of the building.
Functional obsolescence of the building is that the building no longer meets modern standards - outdated architecture of the building, inconvenient layout, engineering support. Such wear and tear is caused by progress in science and technology in the field of architecture and construction technology. Another name for functional wear is obsolescence, which, like physical wear, is removable or irremovable. Economic wear and tear a building is called a decrease in value due to a negative change in its external environment, which is due to economic, political or other reasons. For example, in the area where the object is located, there has been a persistent tendency towards decline, or taxation, insurance have changed, there have been changes in the labor market, tourism, education, etc. Economic wear and tear is also called wear and tear from external influences. The degree of external wear and tear can be significantly affected by the immediate proximity to unattractive natural or artificial objects: swamps, wastewater treatment plants, restaurants, dance floors, gas stations, railway stations and train stations, industrial enterprises. The economic depreciation of a property should be considered irreversible, since the cost of expenses that should be aimed at eliminating external factors is disproportionately high.
External wear and tear can be measured by paired sales analysis, which is the sale of two comparable properties on the real estate market, one with signs of external wear and the other without them. The difference in price will allow us to draw conclusions about the amount of wear of the analyzed object.
Lifespan of real estate determined by a number of factors. Houses age gradually; over time, the moment comes when living in them becomes life-threatening. Considering the modern pace and quality of construction, a relatively young house can become problematic if, for some reason, there is a sharp deterioration in its technical condition, for example, cracked walls, deformation of the foundation, or warped door frames. If such signs are found in the house, the residents are immediately evicted. All issues related to dilapidated and dilapidated housing are regulated by the Regulations approved by the Resolution of the State Duma of the Government of Russia dated January 28, 2006. The Regulations define the requirements for premises intended for human habitation. All premises intended for human habitation must be located in houses located on the territory of residential construction, which is determined by the system zoning plan. Housing must be provided with appropriate communications, such as: electric lighting, drinking water and hot water supply, heating, ventilation, and, where provided, gas. However, in one-story or two-story houses with no centralized utility network, there may be a lack of both a water supply system and a sewerage system.
All engineering systems must always comply with sanitary and epidemiological safety standards. The climate in rooms where people live must comply with standards. Acceptable relative humidity is a humidity of not more than fifty-five percent. And in a heated room, the air should have a normal temperature of eighteen degrees Celsius. Residential premises must be reliably protected from moisture, such as melt, rain or soil, and from leaks from communication systems. Placing a restroom, bathroom, shower or kitchen above living rooms is prohibited. Living rooms and kitchen areas must have windows. For auxiliary or household premises, compliance with this requirement is not necessary. Residential premises are prohibited from being located in basements or ground floors. Houses above five floors must be equipped with a safe elevator.
A house is considered unsuitable for habitation if it is located in areas of a possible landslide or mudflow, snow avalanche, or in an area that is regularly flooded with flood waters. An apartment building located in such an area is considered unsafe and subject to demolition. A house is considered unsafe if there are noticeable deformations of the foundation and load-bearing walls, which confirms the exhaustion of the load-bearing capacity of such a structure and the obvious danger of its destruction. Thus, an apartment building must be recognized as unsafe if it suffers damage in the form of a fire, accident, explosion, earthquake, uneven subsidence of soil and many other phenomena. But recognizing a house as unsafe is only possible if the house is technically beyond repair or if it is not economically feasible. Housing located close to busy highways, within which excessive noise levels have been recorded, is also considered completely unsuitable. In addition, an aggressive environment is sometimes a good reason why people’s lives in a certain place become dangerous.
Found an error in the article?
The determination of depreciation is necessary in order to take into account differences in the characteristics of the new object and the actual property being valued.
Wear in valuation means loss of utility, and therefore value, of the object of valuation for any reason.
There are two ways to calculate wear:
Lifetime method;
Method of dividing into types of wear.
6.3.1. Calculation of wear and tear using the lifetime method
The cumulative accumulated wear is a function of the age of the object.
When calculating wear and tear using the effective age method, the following concepts are used: physical life of the building, effective age, remaining economic life. Let's consider the life periods of the building and the evaluation indicators that characterize them (see Fig. 6.2.)
The physical life of a building (PL) is the period of operation of a building during which the condition of the load-bearing structural elements of the building meets certain criteria (structural reliability, physical durability, etc.). The physical life of an object is established during construction and depends on the capital group of the building. Physical life ends when the object is demolished.
Chronological age (CA) is the period of time that has passed from the commissioning of an object to the date of assessment.
Economic life (EL) is determined by the operating time during which the object generates income. During this period, improvements made contribute to the value of the property.
Effective age (EA) is calculated based on the chronological age of the building, taking into account its technical condition and the economic factors prevailing on the date of assessment that affect the value of the assessed object. Depending on the operating characteristics of the building, the effective age may differ from the chronological age up or down. In the case of normal (typical) operation of a building, the effective age is usually equal to the chronological age.
The remaining economic life (REL) of a building is the period of time from the date of assessment to the end of its economic life (Fig. 6.2).
Determining the depreciation of buildings using the life-span method is based on an examination of the structures of the object being assessed and the assumption that the effective age of the object is related to the typical period of economic life in the same way as accumulated depreciation is related to the cost of reproduction (replacement) of the building.
Indicators of physical wear and tear, effective age and economic life span are in a certain ratio, which can be expressed by the formula
I = (EV: VF) 100% = [EV: (EV + OSFJ)] 100%, (6.4)
where I is wear, %;
EV – effective age, determined by an expert based on the technical condition of the elements or the building as a whole;
VF – typical period of physical life;
RSF – remaining period of physical life.
I = (HV: VF) 100%, (6.5)
where I is wear, %;
VF is a typical period of physical life.
Application of formula 6.5. It is also relevant when calculating percentage adjustments for wear and tear in compared objects (comparative sales method), when it is not possible for the appraiser to inspect selected analogues to determine the indicators used in formula 6.4.
The percentage of depreciation of elements or the building as a whole calculated in this way can be translated into monetary terms (depreciation):
O = SV (I: 100), (6.6)
where I is wear, %;
SV – cost of reproduction (replacement cost).
Example.
A large industrial property complex is subject to assessment. The assessment date was April 1, 2005.
Let's consider the calculation of wear and tear for several warehouses from a given property complex, built in accordance with the same project, used for storing building materials. In accordance with the documentation for the warehouses being assessed, the physical life span is 75 years (FL = 75 years).
The effective age is determined by the appraiser in accordance with the technical condition of the objects being assessed; data for calculating wear and tear are given in the table.
This method of calculating depreciation is applicable for mass valuation, when valuing real estate objects as part of the assets of an enterprise when valuing an enterprise (business).
The disadvantage of using the lifespan method to estimate accumulated wear is that there is only one factor that determines the amount of wear (the ratio of effective age to physical life). To eliminate this drawback, various types of cost reduction factors are considered and the method of dividing into types of wear is used.
Forex classes are a great way for you to prepare for successful work in the Forex market!
6.3.2. Calculation of wear using the method of dividing into types of wear
The most common is method of dividing into types of wear.
Depending on the factors reducing the value of real estate, wear and tear is divided into physical, functional and external (economic). Physical and functional wear and tear can be removable or irreparable. Economic wear and tear, as a rule, cannot be eliminated.
Wear is considered removable if its elimination is physically possible and economically feasible.
The sum of all possible types of depreciation is the accumulated depreciation of the property.
Physical deterioration reflects changes in the physical properties of a property over time (for example, defects in structural elements). Physical wear and tear can occur under the influence of operational factors or under the influence of natural and natural factors.
There are four main methods for calculating physical depreciation:
Expert;
Regulatory (or accounting);
Cost;
Method for calculating the life of a building.
The most accurate and most time-consuming method is expert. It involves creating a list of defects and determining the percentage of wear of all structural elements of a building or structure.
Example.
Table 6.2 determines the wear of individual structural elements of the building using the expert method.
Normative method calculation of physical wear and tear is based on the use of various regulatory instructions at the intersectoral or departmental level. It is used extremely rarely in valuation practice.
Cost method consists in determining the costs of restoring elements of buildings and structures. Through inspection, the percentage of wear and tear of each element of the building is determined, which is then translated into value terms. The cost method is used to determine removable physical wear and tear.
A conditional example of calculating physical depreciation using the cost method is given in Table. 6.4.
This method allows you to immediately calculate the wear and tear of elements and the building as a whole in cost terms. Since the impairment calculation is based on reasonable actual costs of bringing worn-out items to almost new condition, the result of this approach can be considered fairly accurate. The disadvantages of the method are the required detail and accuracy in calculating the costs of repairing worn-out building elements.
Lifetime method used to calculate physical wear, this method is discussed in detail in section 6.3.1. of this manual.
TO functional wear include a decrease in property value associated with inconsistency of design and planning solutions, construction standards, design quality, and manufacturing materials with modern requirements for these items.
The amount of removable wear and tear is determined as the difference between the potential value of the building at the time of its assessment with updated elements and its value at the date of assessment without updated elements (the difference between the cost of reproduction of the building and its replacement cost).
Causes of functional wear:
Disadvantages that require adding elements;
Disadvantages requiring replacement or modernization of elements;
Super improvements.
Deficiencies requiring addition are elements of the building and equipment that do not exist in the existing environment and without which it cannot meet current operating standards there. Depreciation due to these items is measured by the cost of adding these items, including their installation.
Functional wear can be removable or irreparable. Removable functional wear is most often calculated using the cost method.
Deficiencies that require replacement or modernization of elements are items that still perform their functions, but no longer meet modern standards (water and gas meters and fire-fighting equipment). Depreciation for these items is measured as the cost of existing elements, taking into account their physical wear and tear, minus the cost of returning materials, plus the cost of dismantling existing ones, and plus the cost of installing new elements. The cost of returning materials is calculated as the cost of dismantled materials and equipment when used at other facilities (residual value to be processed).
Superimprovements are positions and elements of a structure, the availability of which is currently inadequate to modern requirements of market standards. Removable functional wear in this case is measured as the cost of reproducing super-improved items minus physical wear, plus the cost of dismantling and minus the salvage value of the dismantled elements.
An example of over-improvement would be a situation where the owner of a house, adapting it to his needs, made some changes for his own convenience (investment value) that were not adequate from the point of view of a typical user. These include the redevelopment of the usable area of premises for a specific use, determined by the owner’s hobbies or his occupation. Removable functional wear in such a situation is determined by the current cost of bringing the changed elements to their original state.
In addition, the concept of over-improvement is closely related to the segment of the real estate market, where the same improvements can be considered both appropriate for a specific segment and excessive from the point of view of the typical user.
Table 6.5 provides an example of calculating functional removable wear.
Irremovable functional wear and tear is caused by outdated space-planning and/or structural characteristics of the buildings being assessed relative to modern construction standards. A sign of irreparable functional wear and tear is the economic inexpediency of spending on eliminating these shortcomings. In addition, it is necessary to take into account the market conditions prevailing at the date of the assessment to ensure that the building is adequately architecturally suited to its purpose.
Depending on the specific situation, the cost of irreparable functional wear and tear can be determined in two ways:
Capitalization of losses in rent;
Capitalization of excess operating costs.
To determine the necessary calculation indicators (rental rates, capitalization rates, etc.), adjusted data on comparable analogues are used.
In this case, the selected analogues should not have signs of irreparable functional wear identified in the object being assessed. In addition, the total income generated by the property complex as a whole (building and land) and expressed in rent must be divided accordingly into two components. To allocate part of the income attributable to the building, you can use the investment balance method for the building or the method of analyzing the ratio of the cost of the land plot and the total sales price of the property complex. In the example below, the specified procedure is considered to be completed in the process of preliminary calculations (Table 6.6).
Determination of impairment caused by irreparable functional wear and tear due to an outdated space-planning solution (specific area, cubic capacity) is carried out by the method of capitalizing losses in rent.
Calculation of irreparable functional wear and tear by capitalizing the excess operating costs required to maintain the building in good condition can be done in a similar way. This approach is preferable for assessing the irreparable functional wear and tear of buildings that are distinguished by non-standard architectural solutions and in which, nevertheless, the amount of rent is comparable to the rent for modern analogue facilities, in contrast to the amount of operating costs.
An example of determining the amount of functional wear and tear using the method of capitalizing excess operating costs is presented in Table 6.7.
External (economic) wear and tear– depreciation of an object due to the negative influence of the external environment in relation to the object of assessment: location, market situation, easements imposed on a certain use of real estate, changes in the surrounding infrastructure and legislative decisions in the field of taxation, etc. Although external wear cannot be eliminated in most cases, it can sometimes resolve itself due to a positive change in the surrounding market environment.
The following methods can be used to assess external wear:
Method of capitalizing losses in rent;
Method for capitalizing excess operating costs;
Paired sales method;
Lifetime method.
The assessment of external wear by the method of capitalization of losses in rent and the method of capitalization of excess operating losses is carried out similarly to the calculation by these methods of functional wear discussed above. In the case of an external wear assessment, it is necessary to identify losses in rent caused by signs of external wear or excess operating costs caused by signs of external wear.
The paired sales method is based on the analysis of available price information on recently sold similar properties (paired sales). It is assumed that the objects of paired sale differ from each other only by the economic depreciation identified and related to the object of assessment. A similar approach to calculating external wear is shown in table. 6.8.
Example. It is necessary to assess external wear and tear caused by a decrease in the investment attractiveness of an office building due to the establishment of a clothing or food market in its immediate vicinity. Let a pair sale of objects A and B of a similar purpose be identified on the real estate market. The cost of land in this area is 30% of the total cost of a typical property.
In some cases, the method of comparative sales analysis makes it possible to determine the total accumulated depreciation, as a rule, of a typical valuation object. The average difference between the adjusted replacement cost and the market price of each of the analogues (excluding the cost of the land plot) will be the value expression of the accumulated depreciation. In domestic practice, the considered methods for calculating external wear and tear, based on elements of comparative sales analysis, are in many cases inapplicable due to their high labor intensity, as well as the lack of the necessary and reliable information base.
Reasons for demolition:
The need for redevelopment;
Expansion of transport routes.
The technical condition of the buildings being demolished should be taken into account, which in many cases would allow them to be used for a fairly long period of time.
Example. The subject to assessment is a building that was previously removed from the housing stock and is now adapted for administrative needs. The building is in municipal ownership. The physical deterioration of the assessed building, according to the BTI, at the time of assessment is 40%. The technical condition of the building, location and developed infrastructure indicate a fairly high commercial attractiveness of the property from potential investors. However, according to the redevelopment plan, for the reasons stated above, the building is subject to demolition after five years from the date of assessment.
During the inspection of the object by an expert, the following indicators were determined:
1) the effective age of the building being assessed is 30 years;
2) the remaining economic life is 60 years.
Percentage of accumulated wear excluding activity. external factor is calculated by the formula:
I = EV: (EV+OSEJ)100 = (30:90) 100 = 33%.
Percentage of wear taking into account the action of external factors:
I= (30 / 35) 100 = 86%.
The accumulated wear of 86% calculated in this case is due to the action of predominantly external factors. The share of possible consideration of other types of wear in this result is extremely small, which allows us to consider the result obtained as external wear. A sharp reduction in the remaining economic life of a building leads to a decrease in investment attractiveness and, as a consequence, a precipitous drop in the probable sale price. In such cases, the purpose of the valuation is not to calculate the full ownership rights to the building being valued, but the short-term lease rights for the remaining economic (physical) life, provided that the potential investor sees any benefit from this acquisition.
After calculating the cost of reproduction (replacement cost), as well as accumulated depreciation, the value of the land plot and the valued property as a whole is determined. (Tab. 6.9).
Approaches and methods to the valuation of land plots are discussed in Chapter 7 of this textbook.
To increase the accuracy of calculation procedures for both determining the replacement cost and calculating depreciation, a reasonable compilation of several methods for calculating these indicators is necessary.
Methods for calculating the value of land plots are presented in Chapter 7.
In world practice, three main approaches to assessing the value of real estate are used: cost, income and market, on the basis of which various types of object value are determined - market, investment, replacement cost, replacement cost, etc. (see 5.1.). Real estate valuation methods—the specific ways in which valuation principles are applied—depend on the approach taken.
The real estate valuation process can be divided into six stages: determining the scope of valuation issues (the essence of the valuation), preliminary inspection of the valuation object and concluding a valuation agreement; assessment plan; collection and analysis of information; applying assessment-appropriate approaches; approval and, finally, a report on the result of assessing the value of the object.
Let's analyze the capabilities of each stage of the real estate valuation process.
1. Definition of the task and conclusion of an agreement for the assessment of the property. The customer, as a rule, sets a specific goal for the appraiser - to determine the value of the property, which he needs to make a decision. The interests of the customer may be different: purchase real estate as an investment, sell the property, lend part of their assets, get a loan, pledge property, etc. In each case, the appraiser needs to determine a special specific type of value (for example, determining the market value of a property, investment or collateral value, etc.) and the area of its use (sale, obtaining a loan, insurance, etc.). Utility, substitution and expectation are fundamental principles that help the evaluator understand the nature of the problems at hand.
When appraising a property, it is important to examine the property and determine the legal rights associated with it, since the buyer may only have a lease or limited rights to use the property, have only a certain interest in joint tenancy and partnership, the property may be encumbered with a mortgage, there may be legal restrictions, etc. When solving these problems, the appraiser, as a rule, proceeds from the evaluative principles of balance, change, economic size, and economic division. They allow the appraiser to determine which parts (shares) of real estate should be combined (divided) or in what sequence they should be sold, and all this should be done in the interests of the customer.
After this, the expected costs of money and time for collecting and confirming information are estimated. These estimates will depend on the amount of information the evaluator already has, the uniqueness or complexity of the problem being solved, and the expertise and experience of the evaluator. A situation may arise when it is necessary to conduct an independent examination of the property.
The appraisal of real estate is carried out on the basis of an agreement between the appraiser and the customer. Mandatory requirements for the contract include the need to indicate the type of assessment; type of value of the valuation object; the amount of payment for carrying out this work; as well as information about the educational institution that issued a document on education confirming the receipt of professional knowledge in the field of valuation activities; license issued by an authorized body in accordance with the legislation of the Russian Federation. An appraisal of a real estate property cannot be carried out by an appraiser if he is a founder, owner, shareholder or official of a legal entity, or a customer or an individual with a property interest in the property being assessed.
The cost of assessing a property depends on the complexity of the problem, the amount of expected expenses and the range of services provided. Payment can be in the form of a lump sum payment, an hourly rate, or as a percentage of the final assessment of the value of the property.
A proposal on the terms of the contract serves to clarify the responsibilities of the appraiser and the customer and confirms that the appraiser correctly understood the essence of the problem facing the customer. Concluding an agreement to complete the task and the amount of payment helps to avoid misunderstandings in the future.
2. Evaluation plan. After the essence of the assessment is understood and determined, the appraiser determines possible ways to solve it. To this end, a research program is developed, which becomes the basis of the second stage, called the “evaluation plan” and includes sequential solutions to the following tasks:
A) Structuring the assessment of a real estate property is that the appraiser first studies general value factors at the regional level, then moves on to more specific value factors at the local and segment level, and finally concentrates his attention on specific factors affecting the value of the land plot being valued and located on it real estate objects.
b) Evaluation plan involves collecting the necessary information, processing and identifying the specific segment of the real estate market to which the property being assessed belongs; determination of demand, possible competitors and possible buyers (users); analysis of the parameters of comparable objects, personal characteristics of possible users, market conditions for financing.
V) Specification of approaches to real estate valuation. Each situation has its own approaches that are adequate only to it. To correctly select approaches, it is necessary to determine the criteria for their adequacy to the relevant situation. It is clear that the assessment requirements of government agencies may differ from the requirements of private owners. For example, when privatizing real estate, not economic, but social and political demands come to the fore.
In accordance with the standards for assessing real estate, all three approaches are used and, as a last resort, two, but it is necessary to justify the reason for the choice. The final assessment result is derived taking into account the significance of a particular approach in each specific case.
3. Collection and confirmation of information. The reliability of the evaluator's conclusions depends on the data he used in his work. If they are not accurate, it will be difficult to prepare a valid conclusion. Therefore, the evaluator must collect such information as to support his conclusions in the report or analysis.
In the professional practice of appraisers, a certain system has developed in the selection of the necessary information. Its essence is that the collected data should:
– directly touch the assessed object and be sufficiently fresh, i.e. specific;
– be confirmed by a personal inspection of the property by an appraiser or knowledgeable persons (experts);
– be comparable with data on similar objects available on the market; this comparability is especially important when using financial indicators, in particular when calculating future income;
– provide for the possibility of clarification if distortions or deviations from actual values were made during the process of collecting information;
– relate to the professional experience of the appraiser.
Since redundant information rarely increases the credibility of a report, the data collected should not overload the evaluator's reports.
A qualified selection of the necessary information will allow the appraiser to apply an appropriate approach to real estate valuation for the given case.
4. Approaches to assessing the value of real estate. COST APPROACH involves assessing the cost of complete reproduction or the cost of complete replacement of the property being assessed, then subtracting the amount of physical, moral and economic depreciation and, finally, adding to the value thus obtained the market value of the land plot as undeveloped.
An important and complex element of the cost approach is the determination of wear and tear. It is known that Depreciation is the loss of usefulness and decrease in value of a property due to various reasons.
The cost approach involves performing the following mandatory operations:
1) determining the market value of the land plot on which the property is located (by comparing it with the value of similar plots or using methodological recommendations of government bodies);
2) determination of replacement cost;
3) calculation of all types of depreciation of the property being valued: physical, functional and external and determination of the replacement cost taking into account depreciation (the total depreciation of the property is subtracted from the costs of its reproduction or replacement);
4) calculating the total cost of the property by adding the market value of the land to the net replacement cost of the property.
The first operation is an assessment of the market value of the land plot on which the property is located- represents the study of:
Ownership rights to land;
Physical characteristics of the land plot;
Data on the relationship of the land plot with the environment;
Economic factors characterizing the land plot being assessed.
Sources of this information may be city district land committees and bodies where transactions with land plots are registered, mortgage lending organizations, appraisal and real estate firms specializing in transactions with land plots (for example, the Progal real estate agency, etc.
There are five main methods for assessing the market value of land, based on three basic approaches:
Comparable sales method;
Method of correlation (transfer);
Ground rent capitalization method;
Residue technique method for land;
Land development method.
The comparable sales method involves collating and comparing data on similar vacant land plots sold recently and making adjustments to sales prices.
Comparison of the assessed land plot with comparable plots is carried out according to the following elements:
Location ;
Sales time;
Physical characteristics;
Characteristics of income received from the land plot;
Conditions for financing a land purchase and sale transaction;
Terms of sale;
The matching (transfer) method consists of analyzing the sales of a building located on a similar site and dividing the total sales price into two components - the price of the building and the price of the land.
In this case, the cost of the building and other structures located on this site is initially assessed, then it is subtracted from the total price of the property complex and thereby the value of the land plot is obtained, the result obtained is transferred to the object being valued.
The ground rent capitalization method represents the capitalization of income received through rental payments.
This method is practically impossible to use in Russian conditions, since it is currently impossible to find comparable rental payments and capitalization rates due to the absence of a land rental market as such.
The residual technique method for land when estimating the value of a land plot is applicable in the absence of data on sales of vacant plots of land. Income is calculated based on the profit received taking into account the best and most efficient use of the land and the property built on it.
The method is based on the application of the principle of residual productivity of land.
The land plot development (development) method is used when it is necessary to determine the cost of a plot suitable for dividing into separate individual plots and involves the following sequence of actions:
Determination of the size and number of individual plots (when determining the size of individual plots, physical, legal and economic factors influencing the adoption of this decision are taken into account);
Calculation of the cost of developed plots using the comparable sales method;
Calculation of costs for the development of plots and their sale;
Determining the amount of cash flow by subtracting the costs of developing sites from the total revenue from sales of these sites;
Discounting cash flow taking into account the time of development and sales of all individual land plots.
The discount rate used to discount cash flow should reflect the existing trends in investment efficiency that are emerging in a given market for developed land plots; these rates should be quite high due to the significant risks of development and sale of plots.
The second operation is to determine the gross replacement cost.
There are three main methods for determining the replacement cost (replacement cost) of a property.
1. Comparative unit method (or unit cost method), in which the adjusted cost of a unit of measurement is multiplied by the number of units of the property being valued.
Units of measurement can be square or cubic meters. 1st place, etc. This is the easiest way to evaluate a property.
2. METHOD OF DIVISION BY COMPONENTS, based on determining the components of real estate and multiplying them by aggregated cost indicators.
The components can be: foundation, walls and partitions, ceilings (coverings), roofing, floors, openings, finishing work, engineering equipment, wages, etc. Aggregated indicators can be calculated for 1 m3, 1 m2, 1 linear meter, 1 standard hour, etc.
3. METHOD OF QUANTITATIVE SURVEY consists in drawing up object and summary estimates for the construction of the object being assessed, as if it were being built again.
This is the most labor-intensive method, but it can be significantly simplified if there are old estimates of the assessed object, according to which it was built, or an expert appraiser can resort to the services of a specialist estimator who will develop a new estimate for the assessed object using uniform norms and prices, indices prices for construction and installation works, SNiPs and other necessary documentation.
Typically, indirect costs are 10 to 15 percent of the regional construction cost.
The third operation is to determine the wear and tear of the property.
In valuation activities, depreciation is considered as the main factor in the value of a property when applying the cost approach. Here, depreciation is used to account for differences in the characteristics of the new property and the property being appraised. Accounting for the depreciation of an object is a kind of adjustment to the cost of a newly reproduced building (determined using the cost approach) to determine the current value of the assessed object.
The concept of “wear and tear” used in valuation activities must be distinguished from the concept of “depreciation” used in accounting. Depreciation in accounting is the process of distributing the initial costs associated with the acquisition of an object over its entire service life, without determining its current value.
As you know, there are three types of wear and tear: physical, functional and external (economic).
Physical deterioration reflects a decrease in the performance of a property as a result of both natural physical aging and the influence of external unfavorable factors. Physical wear and tear is taken into account in depreciation rates.
In practice, four main methods are used to calculate the physical deterioration of buildings: expert, cost, regulatory (or accounting) and method of calculating the life of a building.
It should be noted that physical wear and tear can be removable or irreparable.
Removable physical deterioration assumes that the cost of ongoing repairs is less than the added value of the object.
Physical deterioration is considered irreparable when the cost of correcting the defect exceeds the value it would add to the property. Any defect in an object can, in principle, be corrected, but the cost of correction should not exceed the expected benefit.
To determine irreparable physical wear and tear, building elements are divided into two categories: long-term and wear-out. The wear of long-term elements, such as foundations, walls, floors, etc., can be calculated in groups by determining their effective service life and the remaining physical life in real conditions.
To calculate the physical wear and tear of long-term elements, you can also use the method of determining the costs of reproduction of building elements (or the cost method).
In the more accurate adjusted cost method of calculating physical depreciation, the percentage of deterioration of building elements is determined as a weighted value.
The categories of rapidly wearing building elements include elements whose service life is shorter than the estimated economic life of the building. This includes roofing, decorative finishing, painting, etc., i.e. elements that can be repaired (restored) through routine maintenance.
Regulatory (or accounting) method determining the physical deterioration of buildings involves the use of the currently valid “Unified norms of depreciation charges for the complete restoration of fixed assets in the Russian Federation”, approved by Resolution of the Council of Ministers of the USSR of October 29, 1990 No. 1072.
The physical deterioration of a property can be determined method of calculating lifespan. Lifespan of a building or structure are presented in Fig. 5.1.
From point of view functional use The following lifespans of a real estate property are distinguished:
1. Economic life, defining the period of time during which the object can be used as a source of profit. The economic life ends when improvements made no longer contribute to the value of the property.
2. Lifetime, a period of time when an object exists and one can live or work in it.
3. Typical physical lifespan determined by the regulations of the current legislation.
From the point of view of the life period of a real estate property, the following periods are distinguished:
1. Effective age which reflects the age of an object depending on its appearance, technical condition, etc.
Rice. 5.1. Lifespan of a building or structure
2. Chronological (actual) age, corresponding to the period during which the facility is in operation from the moment of its commissioning.
3. Remaining economic life used for the purpose of assessing an object by an expert appraiser and constitutes the period from the date of assessment to the end of the economic life of the object.
The relationship between wear and tear, replacement cost, effective age, and typical physical life can be described by the following formula:
(5.1)
where I is the wear and tear of the property;
And restore is the replacement cost of the property;
EV – effective age;
TS ezh is a typical period of economic life.
In other words, the percentage of depreciation from replacement cost is determined by the ratio of the effective age of the property to the typical economic life.
Functional obsolescence (or functional wear and tear) of an object thing is the object does not meet modern standards in terms of its functional usefulness. This type of wear and tear (can manifest itself in the outdated architecture of the building, in the convenience of its layout, volume, engineering support, etc.) is mainly due to the influence of scientific and technological progress in the field of architecture and construction. Functional wear and tear in domestic practice is called obsolescence and, just like physical wear and tear, it can be removable and irreparable.
Removable functional wear and tear includes the restoration of built-in cabinets, water and gas meters. Plumbing equipment, floor coverings, etc. The criterion for wear and tear, from the point of view of removability, is to compare the amount of repair costs with the amount of additional value received. If the additional value received exceeds the cost of restoration, then functional wear is removable. The amount of removable functional wear and tear is determined as the difference between the potential value of the building at the time of its assessment with updated elements and its value at the same assessment date without updated elements.
Irremovable functional wear and tear refers to a decrease in the value of a building due to factors associated with both excess and deficiency of the quality characteristics of the building. For example, in the rental market, two-room apartments are in greater demand compared to one-room apartments. The amount of this type of depreciation is calculated as the amount of losses from rent when renting out these apartments, multiplied by the rent multiplier (the ratio of the sale price of the property to the potential rent for it) characteristic of this type of apartment. Thus, the amount of irreparable functional wear and tear is determined by capitalizing rental losses.
Economic wear or wear from external influences – This is a decrease in the value of a building due to a negative change in its external environment caused by economic, political or other factors. The reasons for external wear and tear can be both the general decline of the area in which the object is located, and the actions of the government or local administration in the field of taxation and insurance; other changes in the employment, recreation, education, etc. markets.
A significant factor influencing the amount of external wear is the close proximity to “unattractive” natural or artificial objects - swamps, sewage treatment plants, restaurants, dance floors, gas stations, railway stations, hospitals, schools, industrial enterprises, etc.
Favorable and unfavorable environmental factors can affect the value of the property being appraised to a greater extent than similar, but not appraised, properties. This influence is directly reflected in the appraiser’s opinion about the value of the property and is recorded in the report. When an appraiser, during a site survey, identifies problems associated with the state of the environment, he must determine the nature and extent of pollution based on his own research or sanitary and environmental examination. The responsibilities of the appraiser also include recommendations for conducting a detailed examination if various types of contamination were discovered during the initial examination. In cases where environmental pollution problems have been identified or are expected to occur, the appraiser should recommend an environmental assessment prior to commencing the assessment process.
The object being assessed may not be significantly influenced by environmental pollution factors, although this influence may be quite strong on similar objects that are not currently being assessed. In cases where in any area all real estate objects are equally susceptible to environmental influences, it is not advisable to conduct additional analysis.
The decrease in value associated with environmental pollution is determined using methods similar to those for determining depreciation. For example, the cost of toxic waste disposal may be related to the cost of renovating the site, e.g. the cost of removable defects.
Economic wear and tear, in contrast to physical and moral wear and tear, is always considered irreversible, because the amount of costs allocated to eliminating external factors is disproportionately high.
A way to measure external wear and tear is to analyze paired sales (when two comparable objects are sold on the real estate market, one of which has signs of external wear, the other does not). The difference in prices allows us to draw a conclusion about the amount of wear and tear from the external influence of the object being evaluated.
Another way to measure external depreciation is to compare the rental income of two properties similar to the property being assessed, one of which is negatively impacted. Capitalization of income losses from comparing these two objects will characterize the amount of wear and tear from external influences.
Fourth operation - adding land value to replacement cost. This operation is a pure mathematical operation and is based on adding the cost of land with the replacement cost, taking into account depreciation, to obtain the total value of the property.
INCOME POD. Its essence lies in the fact that it is associated with determining the value of future income from the use of a property. The technology for using the income valuation approach involves performing five operations.
First operation: determination of future gross income. Based on data from the annual balance sheets of income and expenses of the enterprise for the last 3 years, the appraiser determines gross income.
The definition of gross income includes:
1. Estimation of potential gross income, i.e. the income that the facility is capable of generating in a year, provided that the space is fully occupied before deducting operating costs. Thus, potential gross income represents the expected total amount from the main activity on the property being valued.
2. An estimate of actual gross income, calculated based on potential gross income. At the same time, losses during collection of payments are subtracted from it, and additional income from the property is added (for example, from business activities on the territory of the property or within it).
If, for example, the cost of a hotel is estimated, then the owner’s income will consist of the following elements: rooms, restaurants, cleaning and laundry services, rent for installed kiosks and shops. The appraiser must take into account the development potential of the entrepreneur and reflect it in his report. The buyer should know that he can increase profits through better management, financial control, the involvement of new production facilities and other factors. These additional income opportunities are typically taken into account by stakeholders during the present value assessment process.
Second operation: subtracting transaction costs. The appraiser analyzes operating expenses that are reflected in the company's balance sheet. This type of costs reflects the costs necessary to maintain the functional suitability of an object, which ensures receipt of gross income.
Operating costs are assumed to be:
Conditionally constant, which do not depend on the degree of exploitation of the property (for example, property tax, insurance premiums, etc.);
Conditional variables that change depending on the degree of use and load of the property (for example, fees for utilities, cleaning, garbage removal, etc.);
Replacement reserves – to replace, during the economic life of the property, its individual elements (structural, operational and interior), especially those that are most susceptible to wear and tear (for example, roofing, plumbing, elevator equipment).
For example, in the case of a hotel valuation, they include the cost of the hotel room, staff and administration fees, advertising, renovations and taxes. All expenses, except depreciation and loan costs, must be deducted from gross turnover to arrive at net income.
Third operation: definition and adjustment to net (operating) income. The adjustment to net income is determined by the individual characteristics of the entrepreneur.
Let's say 70 percent of the income will be spent on paying rent and other production expenses, then the entrepreneur can receive up to 30 percent of the gross income received in the form of remuneration. In the case of a high level of competition, this ratio may change due to a reduction in the entrepreneur's personal income.
It should be noted that net income does not take into account amounts for servicing loans and depreciation charges.
Fourth operation: goodwill valuation and multiplier. Goodwill is defined as “the benefits transferred by the seller of a business to the buyer; a list of clients or customers recognized as a distinct element of the value of a business” (Oxford English Dictionary). The International Accounting Standards Board believes that goodwill is “the difference between the value of a business as a whole and the market price of its assets”. Both definitions characterize the additional value obtained as a result of the individual characteristics of doing business and added to the value of the property being valued.
To determine the value of a potential owner's goodwill, the appraiser must:
· include the owner’s main assets – land and production elements, including machinery and equipment;
· exclude the value of the tenant's real estate (including equipment and equity) and the value of goodwill associated with the name of the previous owner (if any);
· at the customer’s request, separately indicate the cost of certain items related to real estate (furniture, tenant assets, etc.), if a comparative method of real estate valuation is used.
The appraiser multiplies the resulting value of goodwill associated with the property by a coefficient from 1 to 5. The choice of the coefficient depends on the appraiser’s opinion about the reliability of cash flows in the future and the prospects for growth (decline) of the business.
Fifth operation: determining the final value of real estate.
The following methods can be used:
1.
Income capitalization method (direct capitalization method).
2.
Discounted cash flow method.
3.
Remnant technique.
To understand the essence of methods for assessing income-producing real estate, it is necessary to consider the functions of compound interest, which characterize quantitative changes in the value of money over time. These functions generally include:
1. Future value of a single investment – determines the value of the future value of a monetary unit after n periods at compound interest:
(5.2)
where i is the actual compound interest rate
2. Current value of a single investment– corresponds to the current value of the monetary unit, obtained after n periods at a given interest rate per annum:
(5.3)
3. Current value of a single investment for the period– determines the present value of a series of future equal unit payments over n periods at the compound interest rate i:
(5.4)
4. Future value of a single investment for the period – shows what is the future value of a series of future equal unit payments over n periods at the compound interest rate i:
(5.5)
5. Depreciation factor for a single investment – shows what the size of payments should be over n periods so that their present value at interest rate i is equal to 1:
(5.6)
(5.7)
6. Compensation fund factor – calculates the amount of equal payments that would accumulate 1 monetary unit in the account by the end of the annuity period:
Direct capitalization method used if constant or smoothly changing income is forecast. This method is based on the determination of the capitalization rate, which is a capitalization ratio that takes into account both the net profit received from the operation of the property being valued and the reimbursement of capital spent on the acquisition of this property.
In general, the capitalization rate is defined as:
There are other methods for calculating the capitalization rate:
1. Direct matching method consists in comparing the evaluated object with an analogue object. In this case, it is assumed that similar properties have the same capitalization rates.
2. Linked Investment Method applies in the case of using both borrowed and equity capital to purchase a property.
a) the capitalization rate on borrowed funds (mortgage constant) is determined by the ratio of annual debt service payments to the principal amount of the mortgage loan;
b) the capitalization rate on own funds (the capitalization rate of equity capital) is determined by the ratio of the part of the net profit from the operation of the property attributable to equity capital to the amount of equity capital
The overall capitalization rate is determined by weighing its components in proportion to the amount of debt and equity capital in the total amount of invested capital.
The component of borrowed capital is defined as the product of the mortgage constant and the ratio of the amount of borrowed capital to the total amount of invested capital. The equity component is defined as:
3. Ellwood method is a modified linked investment method that takes into account the length of the investment period and changes in the value of the property over time.
4. Cumulative method takes into account in the capitalization rate adjustments for risks associated with investment investments, ineffective investment management, low liquidity of funds and other methods for determining the capitalization rate
The direct capitalization method is based on the fact that income from the use of a property and proceeds from its resale are capitalized into the current value, which will represent the value of the property.
(5.10)
The general formula for determining the value of a property using the direct capitalization method is as follows:
It should be noted that the value of a real estate object (A object), when using the direct capitalization method, can also be identified with the cost of rent for a number of years of operation of the real estate object. In this case, the method of determining the value of the property is called the “direct capitalization of annual rent method.”
Capitalization of the annual rent depends on the individual assessment and risk of rent collection.
, (5.11)
where A object is the cost of the object;
BH – net income;
Г – number of years of lease of the object;
With cap. – rent capitalization coefficient, calculated as the ratio of the amount of net income (NI) to the amount of annual rent (A ar.pl.).
Discounted Cash Flow Method applies in the case of randomly changing and unevenly received cash flows depending on the degree of risk associated with the use of the property.
Using this method assumes:
1. Establishing the duration of receipt of income from the property.
In international valuation practice, it is customary to accept the average duration, unless otherwise provided by additional conditions, as 5–10 years. Among Russian appraisers, the practice has developed to evaluate this period in the range of 3–5 years.
2. Forecasting the amount of cash flows:
Building trends in cash flows of income and expenses;
Frequency of income.
If expenses for reconstruction or modernization of a property are envisaged, then their amount is deducted from net income in the periods in which they occur.
3. Determination of the discount rate.
The discount rate denotes the compound interest used in calculating the present value of future payments.
There are various methods for determining the discount rate:
Construction method;
Method for comparing alternative investments;
Selection method;
Monitoring method.
Construction method is based on the premise that the discount rate is only a function of risk and can be defined as the sum of all risks associated with the acquisition, operation of real estate and other operations (real estate market risk, capital market risk, low liquidity risk, inflation risk, property management risk, financial risk, environmental risk, legislative risk).
At the core method for comparing alternative investments lies the provision that projects with similar risks should have similar discount rates.
Selection method assumes that the discount rate is calculated based on data on completed transactions.
Monitoring method allows you to identify trends in the profitability of alternative investments that are related to the profitability of the property. Such an analysis allows us to make an assumption regarding the likely forecast of changes in the profitability of a property based on monitoring of the real estate market, the results of which are officially published.
4. Discounting of cash flows, which is carried out by bringing the value of cash flows from future periods based on the functions of compound interest and summing up all current values.
The calculation process involves discounting each cash flow with its corresponding discount rate and then adding all the resulting values:
(5.12)
where С t – cash flow of period t; i t – discount rate for cash flow of period t
5. Calculation of proceeds from the sale of a real estate object (reversion) at the end of the period of ownership and bringing it to the current value through the discount rate.
6. Addition of the current values of income streams and proceeds from sales.
7. Calculation of the value of a property as the difference between the current amount of income for the billing period and the amount of borrowed funds.
Residue technique involves the capitalization of income that relates only to one of the components of the funds invested in the property, while the value of the other components is known. Those. such an assessment is made taking into account the influence of individual factors of income generation.
Calculation of the value of a property is carried out in the following sequence:
1. The part of income for a certain period that is necessary to attract investment in a component with a known cost is determined by multiplying the capitalization rate by the value.
2. The amount of income that falls on the second component (unknown) is determined by subtracting the income that falls on the first component from the total income.
3. The value of the second component is determined by dividing the income attributable to it by the corresponding capitalization rate.
4. The value of the property is determined by adding the value of the known component and the calculated value of the unknown component.
MARKET APPROACH is based on an analysis of market sales and is the basis for most real estate appraisals in a market economy. It is based on market information that is easily accessible to the appraiser and allows for a simple, logical judgment about the price of an object.
The process of using this method is quite simple: a real estate object is selected that is similar to the object being valued, which already has a known market price; then, after comparing their technical and economic parameters, the differences are recorded and appropriate adjustments are made in cost form, and the base cost is determined.
Application technology comparative method when assessing the value of real estate, includes five operations:
First operation: collection of comparative data.
The appraiser collects as much information as possible about the sale of similar properties. Sources of information may include: owner registration, information from colleagues, official records and statistics. When collecting information, the appraiser must be confident in its completeness and objectivity. Information on the cost of 1 sq. m. must be present. meters of area of the object, date of transaction, location of the object, terms of the transaction and other indicators that the appraiser deems necessary.
Second operation: study of transactions.
The appraiser must be sure that the transaction took place between two independent parties and the price paid was not influenced by any factors, including close relationships between the parties. In addition, the appraiser must examine the conditions under which agreements were reached on the amount of sale of the property or rent, and compare these values with market information on this matter. The rent for a new building, for example, in the real estate market may be a good indicator, but a transaction between obligated partners or relatives is not.
Third operation: temporary adjustments. Very often, the appraiser has information about transactions that occurred several years ago. In an economy with high inflation, you need to know the exact date of the transaction in order to make mathematical or qualitative adjustments when analyzing the data.
Fourth operation: adjustment of differences between comparable properties.
In real practice, it is difficult to find absolutely similar real estate properties in terms of size, location, age, design, layout, and other parameters. In this situation, the appraiser must approach the problem from the point of view that any information is better than no information. Based on its nature and on the basis of his own experience, the appraiser determines the differences between the compared real estate objects and expresses them in cost form. The appraiser finds these differences in the location of objects, the degree of their wear, and determines differences in many other factors.
Fifth operation: making a decision on the value of real estate.
The issue of comparability of data between two compared real estate objects requires special consideration, since, despite the similarity of various parameters of the property being valued and market analogues, it is possible to come to an incorrect conclusion about the value. The appraiser must compare the size of the property being valued, its age and other factors with similar factors of similar properties, make adjustments in value terms and take them into account in further analysis.
The approaches to real estate valuation described above (cost, income, market) are based on information collected in the same real estate market, but each deals with a different side of this market and can differ significantly from each other. Therefore, the final conclusion is made based on the totality of their results, which, as a rule, should be close. Significant discrepancies indicate either errors in estimates or an imbalance in the real estate market.
5. Coordination of results obtained using different approaches. Reconciliation is a process in which judgment and logic are applied to arrive at a final estimate of the value of a property based on the results obtained through various valuation methods.
This process includes preliminary and final stages.
During the preliminary stage, the appraiser:
– checks the possibility of using the principles of real estate valuation using market, cost and income approaches;
– analyzes from a common sense perspective various amounts of real estate value obtained as a result of applying market, cost and income approaches in assessing the value of real estate;
– ranks the significance of estimates obtained by different methods, depending on the conditions of application of the methods and the specific object;
– checks the reality of primary information.
At the final stage, the appraiser returns to the original problem, uses statistical analysis to develop probable values for the value of the object, and determines its expected maximum values. Then, taking into account his experience and knowledge, he presents the customer with a single estimate of the value of the property.
It should be emphasized once again that reconciliation is not a mechanical averaging of results obtained using market, cost and income approaches, but a process of logical reasoning, conclusions and decisions.
6. Report on the result of the valuation. As a final step, the appraiser writes a report on his findings and conclusions, which he then submits to the client (Appendix 14). Depending on the terms of the contract, this report may be a simple letter drawn up on a standard form or a detailed written report and must not be ambiguous or misleading.
A real estate valuation report is prepared taking into account a thorough analysis of market data and, especially, in cases where environmental pollution occurs.
Thus, a systematic approach to assessing the value of various types of real estate includes three main approaches (market, cost and income), each of which uses a unified set of valuation principles.
St. Petersburg is characterized by obsolescence of buildings, for example, narrow staircases that do not meet modern standards, low ceilings. In cases of significant or physical deterioration, building restoration and repairs may be proposed.
The minimum price for a comprehensive survey of a building is 15–20 thousand rubles.
In countries with a market economy, when assessing commercial real estate, the cost of land is usually 15–30% of the total cost, the average figure is approximately 20%. Despite the fact that this average value is quite approximate, it can be used to evaluate land in our country.
It is necessary to take into account that prices for land plots published in periodicals are, as a rule, so-called seller prices (i.e. inflated prices), while actual transaction prices are needed for comparison and comparison) they are usually 8 – 12% lower than published.
The price of a land plot is somewhat influenced by the degree of distance from St. Petersburg. For example, in the 30-kilometer zone of St. Petersburg, prices are higher than in the remote zone.
In Russian conditions, there is an annual trend of increasing prices for land plots; significant seasonal fluctuations in prices have been registered: in the spring, prices increase, in the winter they fall. Seasonal fluctuations in some areas of the Leningrad region reach 10–15%.
Often the size of land plots is determined based on the economic capabilities of potential investors. The sizes of individual land plots usually range from 6 to 30 acres. Land plots measuring 15 acres are in greatest demand on the market.
Developed land plots are those to which underground utilities, roads, electricity, gas have been installed, and also on which residential buildings have been built according to individual projects.
The costs of developing and selling land include costs for clearing, planning and marking the site, construction of access roads, utilities, electricity and gas supply, as well as overhead costs for maintaining management personnel, security, etc.
The percentage of physical wear and tear, for example, of a residential property, assessed by an expert method, is determined on the basis of the “Rules for the physical wear and tear of residential buildings VSN-53-86” of the State Civil Engineering Committee.
In Russian terminology - standard service life.
Harrison G. Real estate assessment. M., 1994.
The reconciliation process is sometimes called the “examination of conscience.”
| Previous |
