Concept of Real Estate Valuation

Real Estate Valuation Lecture – MSc. Vuong Thi Anh Ngoc

Concept 2 : The real estate market is the sum of civil transactions on real estate in a certain location, within a certain period of time.

Concept 3 : The real estate market is the organization of rights related to land so that they can be exchanged for value between individuals or entities. These rights are independent of the physical features that are commonly referred to as land.

The general concept of the real estate market is as follows:

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 Real estate market in a narrow sense: only includes activities related to real estate transactions such as: buying, selling, leasing, inheritance, mortgage...

 The real estate market in a broad sense: includes not only activities related to real estate transactions but also areas related to real estate creation.

1.3.2. Real estate registration

There are many ways to classify the real estate market, generally only relative, can be summarized as follows:

a. Based on the physical form of the object of exchange

In the real estate market, the objects of exchange are real estate goods, including ownership rights of constructions attached to land and conditional land use rights. This market can be divided into the market for production material real estate and the market for consumer material real estate.

- Real estate market of means of production: including land market (urban and rural residential land; agricultural land, forestry land, land in export processing zones, industrial parks, etc.), industrial factory premises real estate market, etc.

- Consumer real estate market: includes residential real estate, commercial real estate, offices, retail stores, etc.

- It is both a means of production real estate and a means of consumption real estate such as roads, bridges, etc.

b. Based on the area with real estate

Real Estate Valuation Lecture – MSc. Vuong Thi Anh Ngoc

- Urban areas: urban land market, urban housing market, industrial factory real estate market, commercial real estate market, public real estate market, etc.

- Rural areas: rural residential land market, agricultural land market, forestry land market, rural housing market, non-agricultural land market (land for building headquarters, offices, shops, etc.), agricultural production factory real estate market, public real estate market, etc.

- Bordering areas: residential land market, housing market; agricultural land market; industrial factory real estate market, agricultural production; public real estate market, etc.

c. Based on the purpose of real estate use

- Land Market (agricultural and non-agricultural)

- Commercial construction market (headquarters, offices, hotels, shopping centers, stores...) and public construction (transportation, irrigation, healthcare, culture...)

- Industrial construction market (factories, production premises, industrial parks, export processing zones...)

- Housing Market (urban and rural)

- The special construction market has real estate goods which are intangible real estates considered as exploitable resources (tourism business, etc.) such as cultural heritage, historical relics, etc.

d. Based on real estate market activities (business nature)

- Real estate trading and transfer market

- Land use rights auction market

- Real estate rental market

- Mortgage and real estate insurance market

- Real estate service market: includes real estate brokerage services, real estate consulting, real estate information, real estate valuation, real estate maintenance, etc.

Real Estate Valuation Lecture – MSc. Vuong Thi Anh Ngoc

e. Based on the chronological order of real estate entering the market

- Level 1 market: market for transferring, assigning or leasing land use rights (also known as primary real estate market).

- Secondary market: Market for construction of buildings for sale or lease.

- Tertiary market: Market for selling or leasing back properties that have been purchased or leased.

(Source: refer to additional documents of the Ministry of Finance, Vietnam Construction Association, CIEM)

f. According to the level of state control

- Official market: includes transactions that the State can control, such as transactions at auction centers, banks, financial leasing companies, hotels, real estate companies, etc.

Informal market: real estate transactions do not carry out legal procedures such as: hand-to-hand sales, commitments by debt acknowledgment papers.

Synthesizing research results and comments from scientists, it can be said that our country's real estate market includes the primary real estate market and the secondary real estate market.

1.4. Real Estate Valuation

1.4.1. Concept of real estate valuation

Asset valuation has a long history of formation and development in many countries around the world. Valuation is an objective activity that exists in the socio-economic life of every commodity-producing economy, especially for economies that develop according to the market mechanism. In our country, in recent years, the asset valuation profession has also developed very rapidly with many types of businesses participating in the market, and a team of professional valuation staff.

The definition of valuation, up to now, has many different definitions, however, the definitions all consider valuation as the estimation of the price of assets at a certain time. According to the Oxford dictionary, asset valuation is understood as follows: "Asset valuation is the estimation of the value of property rights by

Lecture on Real Estate Valuation - Master. Vuong Thi Anh Ngoc " The form of money suitable for a market, at a time, according to standards for a certain purpose ".

 Valuation is researched and defined by a number of authors around the world as follows:

According to research by Professor W. Seabrooke - University of Portsmouth, UK: "Valuation is an estimate of the value of specific property rights in monetary form for a defined purpose."

- According to Professor Lim Tan Yuan - School of Construction and Real Estate - National University of Singapore: "Valuation is the art or science of estimating the value for a specific purpose of a specific asset at a specific point in time, taking into account all the characteristics of the asset and the basic economic factors of the market, including the types of investment options".

 In Vietnam: Price Law No. 11/2012/QH13 stipulates:

Valuation is the work of a competent state agency or organization,

Individual producers and traders set prices for goods and services.

 In summary: Asset valuation is the act of consulting and determining specific prices for each type of asset as a basis for transactions of buying and selling assets, goods and services on the market. For types of assets, goods and services priced by the State (regulated by competent authorities), the specific prices of each type of asset and goods are mandatory for all subjects participating in transactions and sales. For assets, goods and services not on the list of State-priced assets, organizations and individuals are self-priced according to market rules as a basis for transactions and exchanges.

- Features:

+ Valuation is the work of estimating real estate value (estimating real estate value, or estimating the value of specific real estate ownership rights...)

+ Real estate valuation requires high expertise

+ Real estate value is calculated in money

Real Estate Valuation Lecture – MSc. Vuong Thi Anh Ngoc

+ Real estate value is determined at a specific point in time.

+ Real estate value is determined for a specific purpose

+ Information and data used related to the market.

1.4.2. Purpose of real estate valuation

The purpose of asset valuation in general and real estate valuation in particular can be divided into many types: Purpose, buying and selling real estate, transferring property ownership, mortgage, calculating taxes, liquidating assets, calculating compensation for clearance...

- Valuation for the purpose of buying, selling and transferring real estate : Real estate valuation is the basis for the property owner to set the selling price when putting the real estate on the market. Real estate buyers can also ask consulting units to provide real estate valuation services as a basis for deciding to buy that real estate at such a price is appropriate.

- Valuation serves the purposes of transferring property rights and real estate in the following cases:

+ Equitization of state-owned enterprises

+ Enterprises contribute capital to cooperate in business

+ Merger, consolidation or dissolution

+ Business sale

+ Real estate for rent.

- Real estate valuation is the basis for compensation in the following cases:

+ In compensation and site clearance for investment projects, traffic projects, public works...

+ Compensate for damages to the victim when an incident is caused by another person (for example, causing a house to collapse, damage to neighboring structures...)

- Real estate valuation for mortgage loans : Due to bank regulations, when applying for a loan for business, there must be collateral, the collateral must be valued as a basis for loan consideration. The purpose of this valuation is to ensure the safety of the bank, in case the customer does not have enough

Real Estate Valuation Lecture – MSc. Vuong Thi Anh Ngoc

ability to pay debt. Therefore, asset and real estate valuation is necessary.

- Real estate valuation for insurance purposes : insurance companies need to value assets and insured real estate, on that basis to sign insurance contracts and determine compensation levels for real estate when risks occur.

- Valuation for the purpose of asset liquidation or auction : In business activities involving asset liquidation, it is also necessary to value assets and real estate as a basis for reaching a floor price to conduct auction procedures or consider liquidating assets. (Auction is usually for assets such as land - auction of land use rights).

- Land valuation is the basis for collecting land use tax, land use transfer tax, property tax, registration tax,...

1.4.3. Principles of real estate valuation

Highest and best use principle

The highest and best use is the best use of a property that is physically possible, legally acceptable, financially feasible, and that results in the highest value for the property.

In other words, the highest and best use of an asset is that which achieves the maximum utility under realistic socio-economic circumstances that is technically, legally, and financially feasible and that brings the highest value to the asset.

“Highest and best use” is one of the most basic and important principles of real estate valuation in general and land valuation in particular. Land can be used in very different ways. However, this principle requires the following conditions to be met:

- Legal use : such as satisfying planning, health, environmental factors and legal regulations, recognized and protected by the state.

- Physical characteristics that can be satisfied : For example, having enough area, conditions

on land concessions and access to land etc.

Real Estate Valuation Lecture – MSc. Vuong Thi Anh Ngoc

- Economic feasibility : Represents characteristics such as the predictability of income from land use.

- Highest net income : A “use” that satisfies all the above conditions and yields the highest net income (or has the highest present value of future net income) in a given period of time is called the “highest and best use”.

This principle requires that the valuation of a property be based on its highest and best use, rather than on its current use if the current use is not the highest and best, especially for real estate. Because the highest and best use determines the market price of the property.

The principle of highest and best use is based on the view that between two or more

Many properties may be physically identical or similar to other properties, but may differ significantly in use. A property's optimal use is the basis for determining its market value.

For real estate, the appraiser must consider both the highest and best use.

highest and best use of the land (as vacant land) and the highest and best use of the structures on the land. The market value of land is based on the concept of “highest and best use” which reflects the usefulness and sustainability of the land in a market context, with the structures on the land making up the difference between the value of the cultivated land and the total market value of the improved land.

Substitution principle

When two properties are of equal utility, the one offered at the lowest price will be sold first. According to this principle, a buyer will not normally pay more for a property than it would cost to acquire an equivalent area of land and build a corresponding structure, unless due to time, inconvenience and risk.

Real Estate Valuation Lecture – Master. Vuong Thi Anh Ngoc With this principle, the value of a property is often established based on the selling price of another alternative property similar in terms of convenience, compared within the same value range and the time of sale of these comparable properties.

close to the time of property valuation.

This principle is based on a very simple principle: A buyer of real estate (or land) will not pay a higher price than the price of real estate/land for which he has similar desires and satisfaction. This principle is the basis for three methods: the method of determining land prices according to cost price, determining land prices according to comparable sales price and determining land prices according to income.

Principle of supply and demand

The value of a property is determined by the relationship between supply and demand of that property in the market. In turn, the value of that property also affects the supply and demand of the property. The value of the property changes proportionally to the demand and inversely proportional to the supply of the property. When the demand for a type of property increases under the condition of constant supply, the price of the property increases and vice versa.

Land (land use rights) is a special commodity. However, like any other commodity, its price is formed on the basis of the interaction of supply and demand in the market.

Demand in the land market is understood as the amount of land at a given time that consumers are willing to accept and have the ability to pay for, and supply in the land market is considered as the amount of land area available for exchange on the market at a given time at a certain price. Like other markets, when the supply of land increases but demand does not increase or decrease, the market price will decrease, when the supply decreases but demand does not decrease or increase, the market price will increase. When supply and demand fluctuate in the same direction (both increase or decrease), the price will increase or decrease depending on the difference in the rate of increase or decrease of supply and demand. If the rate of increase of demand is greater than that of supply, the price will increase and vice versa. That is the content of the supply-demand principle, which is also applied and suitable for the land market.

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