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What is the difference b/n price & worth?
Reference sale price or investment worth?
–“A sale price estimate or asset's worth”
- They are both very separate concepts
- –estimated sale price = market value,
- open market value, fair value
Helpful to ask what price would the asset sell for?
–Worth = investment value, intrinsic value, valuation for worth
•what would a specific investor choose to pay for the asset?
Labelling - When and where are the terms valuation and appraisal used?
British tradition: 'valuation' for both price and worth of existing buildings
US tradition: 'appraisal' for all valuation types
Market value (MV) - estimated amount for which a property should exchange on the date of valuation between a willing buyer and seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
MV is the “highest and best use” of the property and excludes what? (3 things)
- Purchase costs
- Sale costs
Why is MV not as simple as it looks?
- 1. estimated amount is “the most probable price reasonably obtained”
- 2. excludes forced sellers, special situations
- 3. assumes both parties “are reasonably informed” about the property, its actual &
- potential uses, the state of the market
- 4. does this exclude deals where buyers / sellers have different information?
- 5. What are “normal” transactions, what is “reasonable”?
What is the bid price of a specific investor
(individual worth)? And when can it be calculated?
- Calculation of worth means the provision of a written statement of the net monetary worth
- at a stated date of the benefits and costs of ownership of a specified interest in property to the instructing party reflecting the purposes specified by that party.
- It can be calculated only given specific
- assumptions of investor.
What does Market Value reflects as the consensus view?
- Changes in income
- Future sale price
- Level of risk
When thinking about worth to individual investor, what specific assumptions would be reflected?
- Forecast rental values and income, sale prices, risk
- Opportunities to add value through active management
- Investor’s portfolio, tax liability, cost of finance, target returns
What goes on in markets formed by buyers and sellers?
buyer sets maximum bid price based on their assessment of worth
seller sets minimum offer price based on their assessment of worth
bid / offer prices for both are normally distributed
each buyer / seller has different forecasts or positions
takes place between pmin (lowest price at which anyone will sell
pmax (highest price at which anyone will buy)
- Each buyer sets maximum bid price based on their assessment of worth
- Each seller sets minimum offer price based on their assessment of worth
- Assume bid / offer prices for both are normally distributed
- Becauseeach buyer / seller has different forecasts or positions
- Trading takes place between Pmin (lowest price at which anyone will sell)
- And Pmax (highest price at which anyone will buy)
What 2 things happen in an efficient market?
- Buyers/seller have full info on prices/qualities
- Equilibrium market price would rapidly converge to P-equil
What (3 things) happens in an inefficient market?
- Buyers and sellers not fully informed, have different bargaining power
- Transactions prices will be randomly distributed around P-equil
- Varying with information & bargaining skill of individual buyers / sellers
Explain the single vertical line in a fully efficient market.
All units bought and sold are identical, all buyers and sellers have full information on transactions prices as they occur. Like a FTSE100 stock. At any point in time, all trades will take place at, or very close to, the equilibrium market price.
Explain the spread of prices in an inefficient market with an average of 100 and a standard deviation of 10.
- The lighter bell curve shows transactions prices in an inefficient market, where buyers and sellers do not have full information on prices. Given uncertainty about what the true equilibrium price is, transactions will be spread around the average depending on the partial information held by buyers and sellers,
- and their relative bargaining power.
What happens in efficient markets with unique equilibrium price?
Homogenous, central trading exchange, full information, high liquidity
Heavily traded stocks and bonds, some commodities
What happens in inefficient markets with a range of prices?
Heterogenous, no central exchange, low volumes, imperfect information
Art, antiques, unlisted companies, OTC derivatives, property, intangibles
Inefficient markets lead to market
valuation problems. How so/ in what way?
- Valuers estimate prices from a range of transactions prices
- Valuation basis: the highest possible price or the most probable price
- Valuation disagreement: different valuers produce different valuations
- Valuation accuracy: valuers have a spread of estimates, transactions have a spread of
- actual prices, the probability of any one valuation being “right” (ie matching an actual transactions price) may be low
- Valuation bias: valuers systematically estimate too high or too low.
When it comes to valuation problems and property, property assets are...
Heteregenous: location, specification, condition, lease, occupier–lightly traded: around 15% of UK commercial buildings traded each year –opaque:no central exchange, partial / unreliable information on prices
Explain why property valuation is difficult –
It's an art, not a science...so it's done by specialists, ideally brokers with best access to market evidence.
How is property valuation inaccurate?
- Fo sold properties, you compare sale prices with previous valuations.
- –UK,last 10 years: 60% valuations within +/-10% of sale price
- – A persistent tendency to undervaluation (by 1% to 8% each year)
- -See RICS Valuation and Sale Price Report
- * The same problems and large
- inaccuracy also occur in art, unlisted companies, etc.