Performing valuations when there’s a shortage of market transaction is a difficult task, but there are a number of considerations to make things easier.
The Australian Property Institute’s Considerations of forming an opinion of value when there is a shortage of market transactions guidance paper offers advice for valuers dealing with this issue in the field.
“Valuers should always investigate and reflect market conditions and sentiment, at the valuation date, in forming their opinion of value, even when there is a shortage of market transactions available for use as valuation inputs as at the date of valuation,” the paper reads.
“In situations where there is a shortage of market transactions available for use as valuation inputs, valuers are should reflect carefully on the interest they are valuing and relevant value determinants that market participants would factor into their judgement.”
Five considerations for valuations with shortage of transactions:
The valuer should consider whether the pre-event methodology should be maintained during or after the event that resulted in the shortage of market transactions. In accordance with international valuation standards, it’s obligatory for the valuer to provide detailed explanations as to why the methodology was adopted.
Disclosure of significant market uncertainty
If there is market uncertainty, then the report needs to state whether this results in a more subjective opinion of value or significant valuation uncertainty – a sensitivity analysis could be included within the report.
Sources of valuation inputs
Explanation of the methodology adopted is critically important when the valuer has a shortage of recent transactional evidence to support the valuation opinion provided. The Valuer must explain the source of valuation inputs.
The analysis and reporting on risk issues are a critical issue in valuations and it’s important the user of the valuation is provided a detailed commentary to ensure the rationale of the valuation assessment is clearly understood.
In the case of other property types or valuation purposes, commentary around risk, or a SWOT analysis may be included, particularly a discussion about any applicable market uncertainty.
Selling methods and periods
There maybe market segments where restrictions are in place regarding personal (public) inspections and public auctions. Real estate agents adapted to restrictions on public inspections and public auctions during the COVID-19 period by introducing alternative marketing and selling processes, which included private inspections, digital (virtual) inspections, and online auctions.
Valuers should be aware that market dynamics change, and different marketing methods should be noted and considered in valuations, including any extended selling periods that arise as a result.
Read a detailed overview of this topic by downloading the guidance paper on the Australian Property Institute’s resourses hub.