Real estate valuation is a professional discipline that tries to estimate the value of a certain property, combining different techniques and methodologies to establish its economic quantification objectively, taking into account the set of qualitative and quantitative characteristics and its location.
In a free market economy like ours. the value of goods is fixed by the balance between supply and demand, being the exploration and analysis of the market, the most appropriate procedure to quantify the value of a property.
The Property Valuation professional combines in his analysis the knowledge of the main economic facts that affect the evolution of the markets and the configuration of cities and their environments, along with aspects related to building and urban planning, as well as other areas of knowledge such as the legal and registration part of real estate. The result of their work is synthesized in a valuation report that represents the most complete audit we can find of a real estate asset.
In recent years, very important steps have been taken for the consolidation and self-regulation of the discipline of real estate valuation. The proliferation of different regulations, standards, manuals, guides and criteria has favored regulation and self-regulation. And, on the other hand, professional growth has been exponential. based on technology and access to information, both in quantity and quality, as well as the result of the experience acquired by the technical experts and their knowledge of local markets, and which has also been transferred through different training programs.
As a result of all this process, real estate valuation has shown great growth and strength, taking giant steps, going from “according to my loyal knowledge and understanding” to becoming a professional discipline based on a science with great methodological foundations and solid knowledge.
However, in recent months an event has happened that was not foreseen in the script. The emergence of the COVID pandemic produced a health crisis that has hit the economy hard and has also affected the real estate sector: the demand for real estate and collaterally real estate assets. The almost complete paralysis of the market during the period of confinement, decreasing activity to a residual level, called into question some of the fundamental paradigms of valuation based on the existence of an active and representative market for comparable real estate.
This situation has shown that in this profession science is not everything. It has a lot of “art” and craft.
From my point of view, the great challenge that valuation companies have had in these circumstances has been to be able to draw a scenario of certainty within a context of great uncertainty. That is, to provide credibility in the face of the lack of visibility in the estimation of how and when the main elements that influence the determination of cash flows will occur, for example, and determine the recovery scenario. that will be different depending on the sector we are analyzing, given the asymmetry in the behavior of demand, has been a real challenge.
Real estate valuation is not just a technique. Knowledge, information. the experience. common sense. I mean. what can be called “craft”, and what I like to call “art”, a deeply human component, are essential.
That is, the burden of subjectivity of the valuer, that part of ‘trade’, is previously incorporated into the application of the calculation methodology that will provide us with an ‘objective’ value. Real estate valuations are not an experimental science, in which the same result is always obtained.
So, is the valuation simply an opinion? Contrasted opinion that depends on the criteria, knowledge and skill of the person who issues it, but opinion, after all, based on that fundamental part of art. creativity or intuition that any valuer must have. And, at the same time, a good ‘trade’ is not achieved without a good knowledge of valuation techniques and methodologies. Price is a fact, value is an opinion about the price that can most likely be paid for an asset.
The ‘abnormality’ generated by the pandemic has forced us to reflect on that subtle balance between scientific method and ability to estimate a value. In many cases, art and craft have weighed more heavily on the scale than science. But the one has never existed without the other. The magic formula is a balance between the use of different methodologies depending on the purpose or purpose of the valuations, and the knowledge of the markets.
The objective conception (science) versus the subjective conception of value (art) introduces us to the theoretical debate about the objectivity or subjectivity of the discipline of real estate valuation: is it art or is it science?
At this point, it would perhaps be necessary to introduce a new nuance regarding the scientific basis and the use of technology and automated valuations with a new reflection: will machines replace professionals in the future?
It is clear that the use of technology is a key factor in order to gain in efficiency and solidity of the results, but it will not supplant the human factor, that necessary component of art, sensations and intuition, the ‘craft’ of people compared to the merely scientific or technological. Although very important, not everything is ‘big data’.
It is necessary to have technology, but ‘art’ is core matter. Information, knowledge and experience are those necessary and essential elements that, together with the use of valuation techniques, make up the ingredients that generate ‘credibility and certainty’ and allow transparency in the valuation process, providing advice and ‘value’ even in situations as adverse as the current ones.