Appunti di Evaluation and Management of Real Estate

The Different Phases of the Property Evaluation Process

The evaluation process is distinguishable into three general stages:

• Preliminary phase
• Operational phase
• Final phase

Preliminary phase: The evaluator identifies the object/purpose, the time of the estimate and defines the category of value to be determined.

The first task of the evaluator is the clear definition of the problem brought to its attention by the customer or client, and therefore the precise identification of all the elements that give rise to the question of assessment and allow the resolution.

Subsequently, we proceed to the selection or evaluation criteria to be applied.

At this stage, it will also be carried out the preparation of the program of work aimed at defining expert's time, resources, costs, areas of investigation where, with whom and on which the expert and his colleagues will have to work.

The purpose is considered implicit if it is the task of the evaluator to identify it/them during.

1. theassessment; in this eventuality the identification of practical reason is part of the estimationprocedure.
2. Operational phase: in this phase starts the collection and analysis of relevant data and information,application of the criteria and evaluation techniques, and the elaboration of the final results.
3. This phase includes actions such as:
   • The collection of all relevant data and consistent with the policy chosen expert, in allsignificant areas of inquiry (the analytical phase is more complex and long)
   • The analysis of all the boundary conditions, their interactions with our problem, in allcombinations considered reasonably likely (this step requires great experience and vastknowledge of macroeconomics and microeconomics as well)
   • The choice of data and boundary conditions considered essential for the estimate.
   • The application of the policy expert and formulation of estimates (minimum, most likely,maximum).
4. Final phase: the last stage of the evaluation process

1. Identification of the problem
2. Purpose of work determination
3. General information
4. Identification of the property, legal and planning and technical profiles
5. Estimation of the property
6. Conclusion

• The appropriate basis

of value, determined by the terms and purpose of the valuation assignment;

b) The respective strengths and weaknesses of the possible evaluation approaches and methods,

c) The applicability of each method according to the nature of the asset and the approaches or methods used by participants in the relevant market,

d) The availability of reliable information needed to apply the method(s).”

The Valuation Approaches:

A) Market Approach (Approaches involving direct comparisons)

B) Income approach (Approaches based on income)

C) Cost approach (Approaches based on replacement costs)

“Valuers should consider the use of multiple approaches and methods and more than one valuation approach or method should be considered and maybe used to arrive at an indication of value, particularly when there are insufficient factual or observable inputs for a single method to produce a reliable conclusion.

The conclusion of value based on those multiple approaches and/or methods should be reasonable and the

process of analysing and reconciling the differing values into a single conclusion, without averaging, should be described by the valuer in the report.

A) MARKET APPROACH (OR SALES COMPARISON APPROACH)

The market approach is based on the estimation of the value of the property through a comparison with recent transaction relative to similar properties from the type, building techniques, maintenance, position and production points of view.

Direct comparisons Procedures features:

• Are based principally on the market comparison approach.
• They arrive at the estimate of value through a comparison:
  • of the property to be valued with recent transaction relative to similar properties
  • from the points of view of type, building techniques, maintenance, position and production.

When to use it:

The market approach should be used as the primary basis for a valuation when:

1. The asset has recently been sold in a transaction appropriate for consideration under the basis of value
2. The asset

or substantially similar assets are actively publicly traded, andc. There are frequent or recent observable transactions in substantially similar assets.

1. Identification of the property and their comparables
   • Location: Identifies characteristics of the area where the property is located
   • Legal Interest/use: Identifies legal permissions or restrictions on the use of the property and any buildings.
   • Plans and drawings: Describes the extraction of information from the plans and drawings. Evaluates nature, specification and adequacy of services
   • Inspection: Assesses actual or potential environmental risks. Analyses market trends and other factors and applies to subject property. Describes the physical inspection of the subject property
   • Market Evidence: Evaluates the inspection of the subject property including the construction and any shortcoming therewith. Describes the collection, analysis and decanting of comparable evidence of similar property assets as appropriate for
1. Capital rental evidence
2. Market analysis and verification of information sources
3. The comparables

1) Capital rental evidence.

2) Market analysis and verification of information sources.

However, a market may be self-contained and be little influenced by activity in other markets, but over a period of time markets will influence each other.

example: Two identical assets in different places can have different market prices.

• Markets rarely operate perfectly with constant equilibrium between supply and demand and an even level of activity, due to various imperfections. Common market imperfections include sudden increases or decreases in demand or asymmetry of knowledge between market participants.

• Because market participants react to these imperfections, a valuation that has the objective of estimating the most probable price in the market has to reflect the conditions in the relevant market on the valuation date, not an adjusted or smoothed price based on a supposed restoration of equilibrium.

3) The comparables.

The main points of comparison can be divided into three main categories:

similarities related to physical sense- similarities related to the legal point of view- Economic and financial similarities

Identify suitable comparable property sales by reference to property type, location, size and specification, date of sale

Analyse comparable sales, ensuring the consistency of analysis and the application of international code of measurement.

Apply valuation method to the subjected property referring to comparable evidence.

4) Unit of comparison

Identify the appropriate unit of comparison as square meter or cad per property (eg. 3 bedroom residential)

For example, a few of the many common units of comparison used for real property interests include:

• price per square meter,
• rent per annual square meter and capitalisation rates.
• price per units of output (eg. price per room, price per garage)

The units of comparison used by market participants can be different between asset classes and even across industries and geographies.

Direct and indirect sources• Direct

sources:- Transactions actually carried out Criticality: - lack of information - availability of actual data - correct data (surfaces, prices, sales, etc.). - Discussions with operators: Local Market Indirect sources: - Public sources: Land Agency - Private sources of information: Bags Estate, Nomisma Scenari Immobiliari, borsinoimmobiliare - Real Estate Operators (Gabetti Fiaip, Tecnocasa,) - Other publications: Sole24Ore The drivers necessary for the comparison: - Sale time - Market conditions - Conditions of Sale - technical Specifications - surface - front / cover - interior - parking space - view - location - presence of public transport Adjustments: according to drivers before mentioned, professional should adjust for any difference between the comparable guideline publicly traded and the subject asset. Examples of common differences that could warrant adjustments may include, but are not limited to: - material physical characteristics (age, size,

specifications, etc),- relevant restrictions on either the subject asset or the comparable assets,- geographical location of the underlying company and the related economic and regulatoryenvironments,- profitability or profit-making capability of the assets,- historical and expected growth,- differences related to marketability and control characteristics of the comparable and thesubject asset.

To evaluate complex assets (as example buildings composed by multiple units), the unit valuesreported market can be calibrated on the intrinsic characteristics of the property being valued inorder to adapt to the specific characteristics of the goods in question that are weighted.Example of correction factors: Floor; Overlooking; size, floor, state of repair.

The property valuation process :

• Identification of the problem
• Purpose of work determination
• general informations
• Identification of the property, legal and planning and technical profiles
• Estimate of the
1. General informations:
   • Identification of the client: Name and address of the client.
   • Details of the appointment: Date and form of the appointment
   • Subject and purpose of the estimate: Sale and purchase, succession, division, conferment, expropriation for public use, constitution or transfer of a real right other than ownership (usufruct, lease, etc.), mortgage loan, insurance, others.
   • Term of the appointment: The period of time assigned for carrying out the appointment.
   • Financial aspect or value: The financial aspect or value is to be identified to which explicit reference may be made. If however, owing to particular circumstances,
2. Conclusion