Basis of Valuation if Wrong will Affect Valuation Accuracy

The second key factor that can affect the accuracy of a valuation is due to an incorrect basis of valuation. To comply with the International Valuation Standards (IVS), a valuer is required “to select the appropriate basis (or bases) of value and follow all applicable requirements associated with that basis of value…”.  

As a basis of valuation may affect or dictate a valuer's choice of methodologies, inputs, and assumptions, as well as the final opinion of value, it is crucial that the basis be suited to the conditions and purpose of the valuation assignment.  

It may be necessary for a valuer to employ a valuation basis that is specified by a law, regulation, private contract, or other document. Bases of valuation need to be evaluated and used appropriately. There are numerous alternative bases of value that are employed in valuations, but most of them share basic components, such as an assumed transaction, an assumed date of the transaction, and the assumed parties to the transaction.  

Examples of bases of valuations include “As Is” Market Value; “As If Complete” Value; “Project Related Site Value”; or “As If Vacant” Market Value. Misunderstood instructions are one of the main causes of valuing a property with a wrong basis. <More>

Example 1:  The Client requires a valuation of her property just before demolishing the existing dwelling to make way for a redevelopment of the site for three townhouses. If the valuer chooses “As Is” Market Value (that includes the value of the dwelling and underlying land) as the basis of valuation instead of its “As If Vacant” Value (that is, just the land value only, given that the dwelling is to be demolished), the valuation outcome will not reflect the true value of the property.   

Example 2: In valuing a parcel of land with a planning permit (or development approval), approved building plans and a quantity surveyor’s costings or builder’s quotation, if the valuation basis is its “As Is” Site Value, this basis will not reflect its “Project Related Site Value”, which by definition is the “premium” added to the “As Is” Site Value from the proposed project or development.