Property valuation reconciliation in Australia and New Zealand
The matter of procedures relating to reconciliation of valuation methodologies has long received a modicum of debate and discussion amongst the profession and its stakeholders. Primary references here are the Australian & New Zealand valuation and Property Standards and the International Valuation Standards (IVSC, 2011).
The “unarguable” overriding principles appear to be:
Valuations must be based on market evidence using one or more methods as considered appropriate in the particular circumstances.
The open market value is to be expressed as a single valuation amount (although a value range may be expressed before being reconciled to a single point figure)
Each and any approach used must be properly explained in the valuation report, together with the perceived “pros and cons” taking into account the specifics of the situation including the purpose of the valuation.
Thus, the relevance or limitations of any approach adopted to be noted, which leads to the various approaches being subsequently reconciled.
The meaning and process of reconciliation - two schools of thought
I don’t think there would be any argument about the foregoing. The IVS and ANZ Valuation standards are pretty clear. However, it is trying to determine what is meant by “reconciling the various approaches” (specifically points 2 and 4 above) which I think is probably a matter open to interpretation.
In the context of where multiple valuation methodologies have been undertaken, broadly speaking the two Schools of Thought appear to revolve around either:
I. Selecting the most appropriate methodology and resting on that valuation amount; i.e. this involves clearly choosing one method over another.
II. Weighting the answer towards the valuation approach considered to be more appropriate for the particular property being valued, e.g. this could involve, for example, choosing a value somewhere in between two methodologies.
Personally, I have adopted the former approach (School of Thought “I”). It was, and I believe still is, the common practice in the banking fraternity based on over 20 years of private practice including expert witnessing and courtroom defence. My thinking has always been that School of Thought “II” above could prove problematic especially where there are three or more methodologies involved. In particular, just where should it be pitched, and secondly how do you decide on the weighting? How do you justify a 70% weighting as against say 75% or 80%? Just seems too much like playing a guessing game without any inherent rigour.
Valuation standards guidance
The relevant ANZ Property standards are not very explicit about what is involved in reconciliation, except to say that:
a) The valuation will normally be arrived at after consideration of several valuation methodologies
b) A reconciliation of the various valuation approaches used may be required and the Valuer should justify the conclusions accordingly
c) The methodology should be appropriately outlined for each approach along with important calculations and rationale. A reconciliation of the approaches adopted should be included.
d) The Valuer will indicate to the mortgagee the basis upon which the valuation has been assessed, i.e. capitalisation of net income, direct comparison, summation or discounted cash flows.
On this basis I could therefore imagine that either interpretation of “reconciliation” could be justified, although perhaps point (d) above definitely seems to suggest the selection of ONE methodology over any other, and therefore by implication the market value to which that methodology subscribes – i.e. aligns with School of Thought I, specifically precluding School of Thought II.
To complicate matters, enter the IVS. Generally speaking they are also fairly non-prescriptive about how you might go about reconciliation of methodologies, but otherwise generally agreeing with statements along the lines that valuations are to be based on the available market evidence and using one or more methods as appropriate noting the relevance or limitations of any approach adopted and reconciling the various approaches. However, Section 7 of the IVS102 Implementation states that:
“More than one valuation approach or method can be used to arrive at an indication of value, especially where there are insufficient factual or observable inputs for a single method to produce a reliable conclusion. Where more than one approach and method is used, the resulting indications of value should be analysed and reconciled to reach a valuation conclusion”.
The above standard seems to indicate that there could be occasions where no one method provides a reliable answer, and therefore somehow the results can be analysed through a non-specified reconciliation process – and subsequently a resultant market value amount obtained. This therefore appears to support School of Thought II, to the specific preclusion of School of Thought I!
What prevails then?
So we can see that there is plenty of scope for either School of Thought to prevail, depending on how you might interpret the Standards. Although I have to say that the IVS standard (S7 of IVS102 as quoted above) certainly envisages very much the exception rather than the rule, and therefore by “default” the prevailing process should be along the lines of School of Thought I rather than II.
By way of further contrast, this brings to mind the kind of language that is typically used by Valuers – the “primary methodology”, and the “check” methodology(ies). This seems to infer support of School of Thought I since “primary” is just that –the one we will rely upon – and the check is merely to see if we can arrive at a broadly similar answer by a presumably less robust but nevertheless relevant method. The check gives us confidence in relying upon the primary. It seems illogical that we should dilute the rigour of the primary by some rather obscure process by picking (“weighting”) some value in between the methodologies.
Conclusion
In conclusion, to my mind School of Thought I is a vastly more logical and rigorous approach, for reasons previously given, and will suffice in the vast majority (and in my experience in fact, all) cases. It is also consistent with my experience as a practitioner in both the private and public sectors. However, I can imagine isolated instances where invocation of School of Thought II might be appropriate which is, I suppose, unlike the ANZ Property Standards, the very reason it seems to have been envisaged by the IVS authors.
