Valuation: the normal margin of error

This article from Estates Gazette is a couple of years old, but still provides a useful description of the “expected” margin of error valuations.

Valuation room for error

To summarise, even for everyday street properties, of which there are many comparables, a difference of 5% between the valuer’s opinion and the price realised is considered acceptable. That is to say, it does not stray into the realms of professional negligence.

So, for a property valued at £200,000, it would be normal to expect the realised price to be within the range £190,000 – £210,000.  Development staff should bear this in mind when running financial appraisals. Valuers’ opinions are not at all precise.

When using the residual value approach to calculate how much development land is worth, Development staff will need to recognise the “multiplier” effect of errors in the Gross Development Value line at the start of the calculation. If, in your area, land represents (say) one third of the total cost of development, a 5% margin of error in the valuer’s prediction of the value of the completed dwellings would translate into a 15% margin of error in the land value. Similarly, if in your area land represents one fifth of the total cost of development, this 5% error in GDP implies that the residual land value that you calculate would have a +/-25% margin of error.

Board members or other decision-makers often do not understand the extent to which valuation is an inexact science, and that it can be very difficult to be definite about how much property (particularly development land) is “worth”. Development staff should highlight this issue, and the range within which the value of land is likely to fall, when seeking approval to purchase. This will enable the decision-makers to take a more informed decision, and strengthens governance.

 

 

 

 

Published: Tuesday, March 17th, 2015, 5:58 pm | Posted in: Resources
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