Abstract

This article concerns theory and practice of real estate valuation. Functions and all types of property values are described in this article, as well as procedures of real estate valuation, all methods and techniques of property valuation, the documentation of valuation and issues concerning value versus the price of real estate dilemma and non – market factors influencing on real estate price.

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THEORY AND PRACTICE OF REAL ESTATE VALUATION

The issue of valuation is exceptionally complex and therefore it is often a source of controversies. By no means is there something like the one and only proper value of real estate. Value is an ambiguous term, understood and defined in various ways, depending upon disciplines and spheres of life. In accordance with the most general definition, value reflects desired and esteemed by the interested parties’ characteristics of the structure being subject to valuation. However, what is valuable from the point of view e.g. of an artist, ecologist or doctor does not have to indicate value in economic sense. In addition, the conflict over value is not a rare thing (e.g. when economic arguments and criteria collide with ecological ones, being sometimes at odds, at least in the short term).

The real estate valuation, by natural course of things, concentrates on the value in economic sense. The existing various theoretical achievements on the issue of value indicate its complexity. In spite of various experience in the issue of valuation, especially in the countries with well developed market economy, neither theory nor practice does come up with unequivocal answer to the question about how much the real estate is worth. Depending on the attitude assumed in the valuation, the value can be either subjective or objective.

The subjective value of a real estate is a value estimated by a party of the purchase and sale transactions, taking into account their individual preferences (including tax preferences) and alternative possibilities of the capital investment (e.g. for a contracting party interested in eliminating competition from the market or getting rid of problematic neighbourhood, the value of the real estate, purchased for this purpose, can be higher than for other contracting parties). The subjective valuation is based on various and individual preferences and intentions relating to the future use of the real estate, as well as on individual assessment of the present functional characteristics of the real estate .

The objective value of a real estate is a value verified by the market that is, obtained through comparing it with the prices of similar civil structures existing on the market. The valuation is not based on individual preferences of the buyer or seller but on the market prices of similar structures. As far as the company valuation theory is concerned, there are three main streams:

absolutist,
relativist,
Mixed.

According to the absolutist stream, the only proper criterion of real estate valuation is the civil structure’s capacity to generate income (income-based value). In this concept, the valuation is content-wise and methodologically subordinate to the investment theory and calculation of investment effectiveness. According to this theory, each investment is a choice between various ways of investment and consists in adoption of such a solution (including purchase of an enterprise) that in a given period guarantees the investor optimal profits.

According to the relativist stream, the object of investment can represent many different values, whereas mixed stream allows various methods of valuation. On one hand, it is theoretically assumed that object of investment is worth as

much as the contracting party interested in it is willing to pay. On the other hand, it is stressed that in practice it is not often possible to assess the market value. That is why methods other than the market one are applied, based on various foundations .

Despite the fact that in theory and practice there are differences in approach to the real estate valuation, some common characteristics and trends can be distinguished:

the purpose of valuation is always clearly specified, and choice of approach, method and technique of the real estate valuation is well founded.
the dates relating to carrying out of valuation are always provided
the value determined on the basis of the real estate’s capacity to generate profits (income-based approach) gains on meaning in the course of the development of the capital market, that is, in the course of increase in alternative investment opportunities.
liquidation value, applied when structure, being subject to valuation, is destined for liquidation, is usually treated as the lowest of possible value levels.
the value of property is distinguished from its price Purchase and sale transactions are daily bread in the developed market economy. In practice they are treated as important wealth indicator, under the assumption that the more transactions being concluded on the real estate market, the richer being a region or a country.
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FUNCTIONS AND PURPOSES OF REAL ESTATE VALUATION

The necessity of the real estate valuation arises in relation with actions of various legal, economic, economic and financial, social, accidental and other reasons. The purpose of valuation results from owner, manager’s and control functions, among others, from record and fiscal functions as well as different official functions.

According to Law on real estate management, the determination of the real estate value is indispensable in the following cases:

sale and purchase of state and communal property (property with public character),
execution of some official activities, conditional upon value of real estate (real estate integration, division, right of pre-emption),
expropriation, compensation for real estate expropriation,
4.establishments of fees in connection with increase in the value of real estate.
purchase of the real estate in favor of the Treasury or municipality,
return of expropriated real estates ,
enfranchisement, privatization, revindication claims, etc.

Typical situations that require real estate valuation are among others: change of the owner and gain of additional sources of capital provided by entities interested, above all through taking real estate loans.

The purposes of valuation project on the choice of methods and procedures of its carrying out. Therefore an indispensable element of each valuation is a question or an answer what for and for whom (by order of whom) the valuation is performed. It is connected with basic functions associated with one another, which form the basis of valuation. The most important are functions of:

information and advice,
decision making ,
negotiations,
solution for conflict of interests arising between contracting parties

The function of advice and information is based on taking into account all the possible factors (both internal and external) that project on the result. The knowledge of these factors is an indispensable element for the rationalization of investment decisions.

betterment levy is a fee fixed due to increase in the property value, caused by construction of technical infrastructure appliances with participation of the Treasury or territorial self- government bodies or by integration or division of the real estate – compare. Whereas re-zoning fee results from change in the real estate value caused by setting or change in local plan of real estate development.

Functions of decision making are based on providing information, for parties interested in purchase and sell transaction, that are indispensable for making decisions regarding purposefulness and effectiveness of the investment, choice of investment variants and sources of their financing, taking into consideration alternative solutions. Functions of negotiations are equal to providing arguments for interested contracting parties (as well as in the case of a loan agreement) that justify valuation proposed in the transaction.

Solving conflicts of interests appears when owner of the real estate has different view of its value than prospective buyer or lender. This situation may be a source of conflicts. One of the main conditions of their avoidance is the clarity of the assumed rules and methods of real estate valuation as well as an early identification of reasons for prospective controversies.

TYPES OF REAL ESTATE VALUES: OPEN MARKET VALUE, REPLACEMENT VALUE, CADASTRAL VALUE, MORTGAGE LENDING VALUE

In accordance with regulations in force, the real estate valuation shall be conducted through determination of it’s:

open market value
replacement value
cadastral value

Open market value is determined for real estates that might be subject to market trade, whereas replacement value – for real estates that, due to current use, are not or cannot be subject to market trade, or when special regulations are required (e.g. regarding protection of historic monuments, assets insurance and others). Cadastral value is determined for real estates that are subject to the ad valorem tax.

In accordance with Real Estate Management Law, open market value of the real estate is an expected price that can be achieved on the market with consideration to the transaction price and upon meeting the following conditions:

contracting parties being independent, not acting against their will and aiming to sign a contract,
the time indispensable for both exposition of the real estate on the market and for the negotiations of the contract terms, being expired.

Among the valuation standards, binding for real estate surveyors, the following kinds of market value of a real estate can be distinguished:

Market value for a way of designated use (MVU) – defines market value understood as above, on making additional assumption of property being used according to the way of its designated use
Market value for an alternative way of use (MVA) – defines market value reflecting forward use of a real estate for purposes different than at present, in the cases where there are possibilities of change in the designated way of use (destination) of the real estate.
Market Value for Optimal Use (MVO)- is determined under assumption of the best and most effective use of a property, that is real, legal, physically possible and resulting in the optimal value.

Replacement value of the real estate equals to costs of its replacement, with consideration to the degree of consumption. During estimation of the replacement value, the value of land and value of components (buildings) is determined. In this case cost approach is applied.

Cadastral value is connected with the real estate cadaster, that is formal, standardized set of information on land real estates, building real estates and housing real estates, their respective owners and managers, as well as on the real estate values that serve as a base for tax determination for respective real estates.

Besides tax function, cadaster performs other important functions:

all together with Land and Mortgage Register system formulates conditions for protection of property right ,
provides official data on real estates, both in individual and in statistical depiction,

is a basic and uniform data base of characterizes creating the open market value of a real estate and real estate prices, i.e. it is used as a source of data for individual valuations and determination of cadastral value that can serve for the tax purposes and other official functions, which require knowledge of the real estate value.

is a data base that is indispensable for real estate management, reasonable spatial economy management and land use (including integration, division, land reclamation)
serves for protection of interests and creation of security of real estate sale parties, as well as creates conditions for development of the real estate market,
is a basis for activation of the capital gained from real estates, including mortgage development.

In accordance with Law on real estate management, cadastral values shall be used to determine tax base of the real estate tax, as well as to determine value of real estates belonging to the Treasury or municipality or while performing official activities, for the performance of which the real estate value is indispensable. The cadastral values, determined in a general property taxation process shall make allowance for differences between various real estates and proximity to market value, possible to achieve only upon application of the methods assumed for the mass valuation.

The property valuation is significant in the case of real estate loans. The effects of the valuation determine the level of safe credit and ,therefore, influence on risk bared by the borrower and lender. They imply necessity to determine value of a real estate used as collateral and determine so called mortgage lending value.

Mortgage lending value is used, above all , to determine safe amount of loan provided by a bank and the collateral that is mortgage for mortgage bank, established on the real estate being subject to perpetual usufruct or belonging to persons or bodies. The mortgage lending value is a value of a real estate being subject to mortgage securing loans, which can be refinanced from the funds obtained as a result of mortgage bonds issue. Therefore, category of mortgage lending value was introduced in some countries, by Law on mortgage bonds and land mortgage banks.

particular with consideration to these characteristics of the real estate and income related thereto, that, under the assumption of reasonable use, can be stable and that can be achieved by every owner of the real estate.

Mortgage lending value of a real estate is determined by the mortgage bank, on the basis of expert analysis. In accordance with Law on mortgage bonds and mortgage banks, mortgage lending value does not have to be determined by surveyors. The regulations of the law only recommend their service. In the face of requirements to be met by the valuation of mortgage lending value, none of the methods mentioned in Law on real estate management, which was not approved by banks as sufficient, does not guarantee sufficient reliability, which is required in the case of mortgage bonds’ issue. Therefore, additional regulations and procedures, favorable to reliability of the collateral valuation and accuracy of price estimation, are indispensable.

To standardize the principles and methodologies of valuation, European Mortgage Federation prepared conception of European Mortgage Lending Value – EMLV, based on the following principles :

careful assessment of the prospective sale opportunities
determination and elimination of speculative elements
reflection of typical and local conditions on the market
admission that long term aspects of the real estate keeping are of the first-rate importance • consideration of current and alternative methods of the real estate use
transparent and clearly specified methods of valuation
valuation carried out by surveyors with proper qualifications that, on carrying out the valuation, apply special rules, specific for a country where the valuation takes place.

According to the recommendation of the National Bank of some countries, the mortgage lending value shall be determined „after conducting analysis of results obtained on use of income and cost approach (calculated separately). In the case of divergence between results obtained on the use of income and cost approach (replacement costs method), on determining the mortgage lending value the following results are of fundamental significance: • result obtained through application of income-based approach for a real estate with economic destination (in this case result obtained through application of cost approach is usually of secondary, information significance),

result obtained through application of cost approach for real estates with housing destinations (in this case result obtained through application of income-based approach is usually of secondary, information significance).

The mortgage lending value of a real estate shall not exceed its current open market value (transactional price) in the time of valuation or its credit allowance. On this basis it can be assumed that the term of the mortgage lending value refers, in some respect, to definition of the open market value, however, the idea of the mortgage lending value additionally takes into account what can be called as “smoothing” of the market prices trends, rents revenues and profitability indexes.

PROCEDURES OF REAL ESTATE VALUATION

The procedures of the real estate valuation are based on law regulations and surveyors’ standards. The real estate valuation is regulated by separate regulations stipulated in Law on real estate management. the valuation of real estate belonging to the Treasury or municipality can only be carried out by surveyors.

In some countries, there had been no precise regulations that would concern principles of valuation or status of surveyor. The status of surveyor has been subject to regulations through determination of:

rights,
duties,
liabilities (including sanctions),
principles of occupational activity insurance.

Regardless of law regulations, procedures and principles of real estate valuation are precisely specified in the occupational standards of real estate valuation. These standards have been developed on the basis of international standards, but, in the course of their evolution, national standards are also being gradually modified and prepared for publication, as well as general national principles of valuation. The latest form of occupational standards, is directed at resignation from their previous instructional form, which at the same time means increase in the liability of surveyors that conduct valuation. It is not enough to just comply formally with „operation manual”, that is, with what previous occupational standards used to be.

BASIC SOURCES ON INFORMATION IN REAL ESTATE VALUATION PROCESS

The real estate valuation requires information and data on constructions being subjects to valuation. However, domestic system of information on real properties and their prices is far from perfection. It is some kind of heritage after the previous, non-market economic system, where real estate sales were, in the nature of things, highly limited. Currently the work is being done to put in order statistical and census systems. Despite the fact that in Law on real estate management a special article was devoted for official research of the real estate market, the system of collection of data on real properties is still in a phase of creation. Therefore sources of information are dispersed and their range and quality do not completely meet requirements of the valuation.

The basic sources of information on real properties are of official, legally regulated character. Such sources include: the Land and Mortgage Register or collections of documents for real estates with no Land and Mortgage Register, land and buildings registers, tables and appraisal maps, basic maps, geodesic register of land service infrastructures network, local plan of land development, public geodesic and cartographical stock, estimated rates of land and lists carried out by Tax Office. In the case of real estate valuation, additionally, the use is made of information on transactional prices achieved on local markets as well as of statistical data registers, including above all the Central Statistical Office of some countries. The significant sources of information are collections of unit

price indexes and specialized catalogues of material expenditures in the construction industry, technical and design documentation, collection of data belonging to insurance companies, banks, etc.

Local plans of land development have a significant influence on the real estate value and its changes. The base of local plan is to determine study of circumstances and directions of land development of the municipality. The local plan of land development is one of the main factors taken into consideration during the preparation of the appraisal report.

METHODS AND TECHNIQUES OF PROPERTY VALUATION

6.1. GENERAL CHARACTERISTIC OF VALUATION METHODS AND EXTENT OF THEIR USE

The real estate valuation is based on specification of value of property rights or other rights to real estate , including right of perpetual usufruct. The real estate valuation is carried out with consideration to its specificity, purposes and availability of the market data.

The approaches, methods and techniques used in the real estate valuation. one can distinguish two approaches that comprise proper methods that, in their turn, comprise techniques of valuation as detailed procedures used in property valuation.

Table 1.

Approaches, methods and techniques used for propery valuation

6.2. COMPARATIVE APPROACH (PRICE AND COMPARATIVE METHOD)

The comparative approach is applied in the open market value estimation. It is based on specification of real estate value, assuming that the value corresponds to prices achieved for similar real estates, subject to market sales. Such an achieved value needs to be corrected taking into account the characteristics that distinguish the real estates, as well as changes in price levels resulting from passage of time and period between valuations. While applying comparative approach, it is necessary to know transactional prices of real estates that can be compared to the real estate being subject to valuation, taking into

account such characteristics of the real estate that can have significant influence on its price level. In the case of comparative approach, methods of in-pair comparison, average price correction or statistical analysis of market are applied. In the method of in-pair comparison the real estate, which is subject to valuation and the characteristics of which are known, is compared one by one with similar real estates. In the case of method of average price correction, similar real estates from the local market are accepted for comparisons, taking into account location of the real estate, in the number of at least dozen or so, which have been subject to market sales and transactional prices, terms of a deal and the characteristics of which are known. The value of real estates being subject to valuation is determined through the correction of average price of similar real estates – correcting factors taking into account differences in the particular characteristics of these real estates. On the other hand, in the statistical analysis of the market, set of transactional prices is assumed, to determine value of representative real estates, applying methods for statistical analysis.

6.3. INCOME–BASED APPROACH (INVESTMENT METHOD, PROFIT METHOD)

The income-based approach consists in the determination of the real estate value, assuming that its purchaser/buyer shall pay price, the amount of which will depend on the expected income that he/she hopes to obtain from the real estate in the future. This method is applied in the case of real estate that already generate or may generate income in the future. It is necessary to know the amount of obtained income or rent possible to obtain.

In the income-based approach investment method is applied, if real estate generates income from rents, and its amount can be determined through analysis of development of market lease and rental rents.

On the other hand, the income-based method is applied through determination of value of real estate generating income, but from sources different than rents. In this case, the income shall be determined in the amount equal to the share of real estate owner in profits, obtained from economic activity, in the course of the use of the real estate. In both methods techniques of simple capitalization and money stream discounting are applied.

While applying technique of simple capitalization, the real estate value is determined as the product of annual income and capitalization factor, indicating period of return on investment. The factor is one of the way of determination of the rate of return on investment in real estate and period of return on expenditures for purchase of real estate (return achieved by income generated by real estate). The amount of the capitalization factor is determined on the basis of real estate market research as mutual relation between transactional price paid for the real estate and annual income possible to obtain from this real estate.

Capitalization factor equals to the reverse of capitalization rate, that, in turn is, quotient of gross annual income and investment expenditure. For example, if annual income amounts to 1000 PLN and investment expenditure to 10 000 PLN, capitalization rate amounts to 10% (1000/10 000), whereas capitalization factor 10, which means that ROI amounts to 10 years. The capitalization rate compared to income from a given investment (real estate) enables consideration of price claimed in the background of its open market value. Whether real estate price is overestimated or not, it depends on rate of income obtained from similar real estates on the same market that is on market rate of ROI…

The important disadvantage of valuation method based on capitalization rate is that, as a rule, it appeals to operational gross income only for the first year (thus invariability of annual income is assumed), what is more, it does not take into consideration profit obtained from increase in property real estate.

The determination of the real estate value with the use of technique of money stream discounting consists in calculation of sum of discounted money streams of expected income from real estates in particular years of its use. The sum is increased by residual (final) value of the real estate, that is its value after the passage of last year of the forecast assumed for discounting of the money streams. Discount rate in these calculations shall reflect minimal, limitary required pay off rate from investment and reflect relation between yearly income obtained from the real estate and expenditures paid for its purchase.

If there is increase in prices on the real estate market and, as a consequence, decrease in investment risk in this sectors, discount rate assumed in the real estate valuation is usually lower than discount rate assumed in the valuation of companies.

6.4. COST APPROACH (METHOD OF REPLACEMENT COSTS, SUBSTITUTION COSTS)

Cost approach is applied through determination of the replacement value. It consists in determination of the real estate value, under the assumption that such value corresponds to costs of its replacement, diminished by value of the real estate consumption. The cost of purchase of land and cost of replacement of its components (e.g. buildings) are determined separately. In the case of cost approach the methods of replacement and substitution costs are applied.

The method of replacement costs consists in determination how much it would cost to replace real estate components through application of the same technology that was used to its construction or coming into being. The method of substitution costs just enables determination how much it would cost to replace these real estate components with structures with the same function that is at present exercised by the structures being used, if they were made by use of currently applied technologies and materials.

In both methods detailed technique, technique of self-contained elements and index technique can be applied. The detailed technique consists in determination of type and extent of indispensable building works to be carried out and their respective unit prices. In the case of index technique the starting point consists in respective indicators for particular works or structures, made on the basis of comparison with other structures.

6.5. MIXED APPROACH

In the mixed approach the residual method, the method of liquidation costs or method of estimated land indexes are applied. The residual method is applied in the case when there are changes to be carried out in the real estate which is subject to valuation (development, extension, modernization). Then the value of the real estate after such changes is estimated, and from such an estimated value costs of changes are subtracted, with consideration to profit obtained by the investor.

If expenditures, indispensable to bring the real estate back to condition in which it can be subject to use, are higher than value of the real estate without necessity of such expenditures, the value of the real estate can be negative.

The method of liquidation costs consists in determination of the value of post partition material, diminished by costs of structure demolition or its liquidation. The detailed techniques are applied.

Method of estimated land indexes applied to determine the value of the real estate designated, according to local plans, for agriculture purposes or used for such purposes. Then the real estate value is determined as a product of estimate rate of 1 ha of land and determined by separate regulations price of 1 diction (quintal that is 100 kg) of rye, specified in accordance with regulations on classes of quality classification land and on agricultural tax .

The choice of method and approach shall be adjusted to the type and function of the real estate, valuation purpose and data availability. This right is paid, transferable and hereditary. In Law on real estate management the issues of fees resulting from perpetual usufruct of land property being subject to perpetual usufruct are treated separately. While determining open market value of land property as a subject to right of perpetual usufruct, the comparative approach is applied, assuming that transactional prices obtained by land, not built-up, real estate sale as a subject to the right of perpetual usufruct , with consideration to amount of percentage rates of annual fees and non-used period of duration of the right of perpetual usufruct.

If on the real estate market, proper due to location of the real estate , there are no sales of real estates being subject to the right of perpetual usufruct , but there have been sales of real estates subject to proprietary right, open market value is estimated on the basis of mutual relations of prices of real estates subjects to the right of perpetual usufruct and the prices of real estates subjects to proprietary right obtained on deals carried out on different, comparable real estate markets.

7.DOCUMENTATION OF VALUATION. APPRAISAL REPORT

The basic form of documentation of valuation is an appraisal report, drawn up by surveyor, including characteristics of the procedures and basis of valuation, as well as its results. Such a report is an author’s opinion of surveyor on the real estate value, prepared exclusively in writing. It shows, among others, legal basis and circumstances of taken actions, relating to appraisal of the real estate value , basis and justification of choice of the approach, methods and techniques of appraisal, as well as of others methodological solutions. Furthermore, the report includes performance of calculation course, as well as final result of valuation and its justification.

In the appraisal report, the way of determination of the real estate value is indicated, including: the determination of object, range and purpose of valuation, formal base of real estate valuation, as well as sources of information on the real estate, determination of dates significant for estimation of the real estate value, including date of its inspection. Furthermore, the appraisal report contains description of the condition of real estate and indication of its intended use, as well as real estate market analysis and characteristics regarding assumed purpose and way of valuation. The appraisal report include also special clauses that indicate particular circumstances regarding the real estate valuation. To appraisal reports are attached significant documents used for its preparation, including transcript and sketch of local plan, and in the case of lack of such a plan, decision on the location of the structure, map with real estate register, extract from Land and Mortgage Register set up for the real estate. In the case of lack of such an extract, the certificate of a proper court shall be attached, confirming that the real estate does not have Land and Mortgage Register, etc.

The confirmation of relevance of the appraisal report by surveyor who prepared it, occurs through the clause attached to appraisal report , in which the surveyor declares report’s relevance.

Regardless of the appraisal report, the surveyor can prepare studies, reports and expertise’s regarding:

real estate market and consultancy on the real estate;
effectiveness of investment in the real estate as well as its development
financial effects of establishment or change in the local plan:
designation of subject to separate real estates of premises
mortgage lending value of the real estate
appraisal of the real estate value, to meet needs of individual investor
valuation of real estates classified as investments, in accordance with requirements of regulations on accountancy;
valuation of real estates as fixed assets of the units, in accordance with requirements of regulations on accountancy.
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8.VALUATION REPORT

As it is contrary to the appraisal report, which refers only to the real estate valuation day, the valuation report also refers to valuation of investments and assessment of their effectiveness, companies and their real estates valuation, intangible assets, machines and equipment as well as other elements of a real estate (assets).

The content of valuation reports is determined by International Valuation Standards published by International Valuation Standards Committee -IVSC, as well as guidelines and standards of such organizations specializing in real estates and business valuations as: Appraisal Foundation, American Society of Appraisers – ASA and Institute of Business Appraisers – IBA. The Royal Institution of Chartered Surveyors – RICS and The European Group of Valuers Associations – TEGoVA. E.g. Standard No. 7 TEGoVA 2000 refers to the issues of value forecast. It is some kind of novum regarding ways of real estate value estimation – divergence from inflexible rule that market value or other shall be determined exclusively for a specific day. The standard regulates, among others, such issues as estimation of forecast real estate value, which requires:

market trends analysis, as far as overall income, expenditures, index of non used premises, capitalization rate and discount rate in the valuation date are concerned
economic trends analysis, which results in over viewing evolutions of demographic structures and socio- economic evolutions, employment indexes and future competition
study of economic cycles as well as micro- and macroeconomic indexes.

The conclusions based on the analysis and report shall appeal to specified time frameworks, which the analysis refers to, with the purpose of the clear indication of market conditions and points of reference, for which the surveyor conducted valuation. They shall avoid speculative elements that influence on the increase in value change risk.

9.VALUE VERSUS PRICE OF REAL ESTATE

Although the real estate value is basis and starting point for the determination of its transactional price, it does not mean that the transaction will be made at a price equal to value. The actual price can significantly differ, in plus or in minus, from the real estate value. It depends on different kinds of factors that characterize real estate market, including above all the degree of real estate market saturation (supply) and amount of demand, expressed by the number of prospective buyers.

The property value is not any absolute. The actual price, at which purchase and sale transaction of real estate will be made, is usually known neither to seller, nor to the buyer before conclusion of the transaction. In the course of negotiations which precede conclusion of the transaction, each party represents own valuation of the same real estate. Usually the valuations differ significantly because, as a rule, points of view and calculations of seller and a buyer are different. The calculations are subjective, however the market makes them objective. The final appraisal of real estate price takes place only in the moment concluding the purchase/ sale transaction.

The price (transactional) results from negotiations between the parties, that is from clashing of subjective valuations with objective factors of valuation. That is why one cannot identify the value of the real estate with its price. In this sense real estate valuation should be treated as value estimation. It is particularly significant as in Law on real estate management a number of aberrations from real estate value appraised by surveyor has been set forth.

While concluding transactions in non bid course (it refers to some kinds of real estates e.g. housing , historic or used for the public purposes), the authority, on behalf of the Treasury, municipality as well as public or communal body, in accordance with policy of property management, can provide the buyers with price discounts. In each case however, the real estates price shall remain in a specified relation to real estate value, as it is indispensable condition to control rationalization of public and communal real estates management.

10.NON-MARKET FACTORS INFLUENCING REAL ESTATE PRICE

The estimation of open market value of real estate is based under assumption that contracting parties of purchase/sale transaction being independent from each other and not acting in compulsory situation. However, in practice there are situations in which such conditions are not met. In this case one has to do with situations different than assumed.

One of them is example of forced sale that is when bank sales mortgage charged real estate e, if the borrower is not able to pay off the credit.

This case is one of the most frequent; however, it is also possible to sale real estate by other lender with collateral, who does not have other possibility of getting the money back.

The other case is so called sale resulting from necessity. Analogically as forced purchase it means that normal market conditions are not met and there are time limitations or others for finalization of transaction, what mostly marginalizes or even excludes indispensable for rationalization of transaction prepared procedures (e.g. marketing procedures) and negotiating procedures, which leads to price deformation.

In such situations one of the contracting parties’ loses, characteristically for market transaction, market sovereignty, whereas the other, stronger and privileged party takes advantage of position to impose price terms.

Value Of Real Estate

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