“Beauty is in the eyes of the beholder” is a very popular expression attributed to Margaret Wolfe Hungerford (née Hamilton), who wrote several books under the pseudonym “The Duchess.”
Unfortunately, the author of this article is a real estate practitioner and can only write with authority on real estate. The context of Margaret Wolfe Hungerfold’s statement above points to the concept of value in real estate.
Technically speaking, a property’s value is defined as the present worth of future benefits arising from its ownership. Unlike many consumer goods that are quickly used, the benefits of real property are generally realised over a long period of time (Investopedia). This is to ensure there is no confusion between price and value. Price is what you pay, and value is what you get (Warren Buffett).
The classical definition defines price as the amount of money paid by the buyer to the seller in exchange for goods or services. Value acknowledges whether that product or service is worth the money to be paid. Value is not expressed in money; it varies from one person to another.
Adam Smith also provided the best example of price vs. value in the paradox of value. No one can live without water, but its price is low, yet anyone is able to live without diamonds, but its price is high. The value of water is high, but it is abundant in nature, so the price is low. The value of a diamond is low, but still, it is a status symbol, so the price is high.
Professional valuer services are required to ascertain the value of real estate, as this is a regulated, specialised field. However, at a personal level, as we are all entitled to an opinion, one can always give an opinion on the real estate in question. This ultimately gives a single property several values, as each opinion is supported by one’s own assumptions, perceptions, and personal circumstances.
Is there a wrong value, one may ask? By definition, valuation is fundamentally a purposive and comparative exercise in which, without clarity on the requirement, any number given is correct; thus, the answer is NO, as long as the assumptions made support the value and the process followed is consistent with the prescribed methodology. Further definition of valuation is given as “the art and science of expressing an opinion in the mathematical form”, and given that it is an “art” of expressing an “opinion”, elements of subjectivity arise but watered down with “science” expressed in “mathematical form” making it objective. From the above, why would there be any argument with a professional valuer’s work supported by assumptions and research carried out accordingly with supporting evidence? One wonders, as it probably only happens in Zimbabwe.
It is common practice to find a single building with several values ascribed to it, such as fair value, market value, insurance value, investment value, etc., and each value has its own methodology to follow. To give meaning to this we need to clarify the role of property value. Property value is required to assess the accurate value of a property during its sale and purchase. Further, it aids in tax calculation, evaluating the return on investment, assessing income-generating potential, and loan purposes.
To bring sanity to this field, valuations can only be done by accredited professionals whom International Valuation Standards guide in their approach and methodology as they interpret the market relating it to the subject property being guided by supply and demand factors, location, neighbourhood features and facilities, size, layout, age and condition of the respective property—quite a process with skills harnessed over the years to master and perfect the art. The property market is dynamic and keeps changing, reacting to trending circumstances. As such, valuation exercises must be carried out regularly.
There is always the unwelcome reality that one cannot create value in one’s mind just as much as one cannot wish the value away. Value is a fundamental matter of fact. Either you have it, or you do not. By extension, respecting a professional’s work is supreme and gentlemanly.
The article was written by Mike Eric Juru the founder and Chief Executive Officer for Integrated Properties. The view expressed in this article are purely his and do not represent the organisations that are associated with him. Mike can be contacted at 0773805000 or by email mejuru@intpro.co.zw