Valuation Methods. Contractor’s.

In some cases, the 4 other methods of valuation (Comparison, Residual, Profits and Investment) are just not suitable for a particular property.  Some buildings are designed to be used by Town Councils or public sector/healthcare/military workers and are therefore quite unique and it’s simply not appropriate or possible to value it for a commercial use.  These properties very rarely change hands and because of this, almost no comparable evidence is available.

In this case, the Contractors method of valuation can be used (also known as Summation). It is not without it’s limitations it has to be said and is sometimes referred to as a ‘last resort’ method.  This is because it works on the basis of a building or property’s value being the same as cost (which in most cases is a flawed concept, as ‘cost’ is a fairly definite sum, whereas ‘value’ is not).

The Contractors method works on the idea of the cost of the land plus the cost of the buildings upon it equals the value of the property as a whole.  This sounds about as simple as it’s possible to get in Real Estate valuation, however it’s in the detail that the skill lies.  The users of these non-commercial buildings could hypothetically move to a different site and have a similar building constructed.  As no aspect of competition exists, the value is quite likely to be similar whichever site is used (assuming it’s a similar size).  The value of the land should only be based upon the intended use, not best use.  This is because land where (for example) offices are permitted to be built would be worth considerably more than land upon which only a fire-station could be built.

Another consideration is that the value of a new building would be worth more (theoretically) than the value of one that which already stood on the site.  There must be some amount of depreciation for general wear-and-tear and obsolescence.  The basic equation for the Contractor’s Valuation is:

        Cost of Building

plus Cost of Site

     = Total Cost of Similar Property

   less Amount for depreciation and obsolescence

           = Value of Existing Property

In practice, the process of establishing the value would be:

  1. Apply build costs (at a rate per Sq Ft/M) at the time of valuation, and discount this by a percentage to allow for depreciation and obsolescence (this could be 25% for obsolescence and a further 15% for depreciation).
  2. Add the revised total build costs to the land value, including costs of plot works and fees.
  3. The result is the value of the property.

Clearly this method has its limitations; Not only can build costs be difficult to establish with accuracy (due to the envisaged specialist nature of the building), but the level of discount to be applied to allow for obsolescence and depreciation must be quite specific.

Valuation is (quoted from the Royal Institution of Chartered Surveyors) ‘an art, not a science’.  This means that although the methodology is reasonably straight forward, the application of it not simple.

Leave a Reply

Your email address will not be published. Required fields are marked *