Measurement Properties of the Central Sensitization Inventory, Coursework Example
Precise and accurate cost assumption are essential in the development of budgets in the short-term and long-term plan for projects such as the one our client, Wyndham Estate is interested in. These assumptions assist these type of businesses in the creation of proposals for contracts that need an approximation in the total costs. If these assumptions are not accurate and correct, Wyndham Estate risks running on an over budget and may end up spending money unnecessarily.
There are various assumptions that Wyndham Estate needs to consider before divulging in the exercise of investing in the property. These include salary costs, material costs and indirect costs. They are all project costs that have different assumptions that are relevant to our client before they can invest on the property stated.
Salary costs: The managers at Wyndham can assume the cost of wages and salaries typically for projection in the budget process. For instance, in Wyndham Estate’s case, they need a marketing manager who is going to develop materials that are going to be used for marketing and also execute the company’s marketing strategies. According to the time the company is planning to invest on the premises, the marketing manager develops a salary cost assumption that is equal to this amount of time. Similarly, for the hourly workers, their cost assumption is found by giving an estimation of the number of hours need for the work multiplied by the number of employees and their pay per hour.
Material costs: There are raw materials that are required for this project to take place and they are part and parcel of the overall direct cost incurred by the project. The manager at Wyndham can develop assumptions on the budget of the material. They can do this with the help of experiences in the past with other projects or from other provided methods of estimation. For example, Wyndham Estate has developed such projects in the past and therefore, they can use the material costs on that project to assume the material cost for this project. Equally, if they want to find out the cost of building per square meter, they can use the scale model to find the assumptions.
Indirect costs: They will also be part of the worksheet for Wyndham Estate’s budget assumptions. Indirect costs according to (Georgia Warren-Myers 2019) are not necessarily related to the final result of the project, but they must still be catered for in the budget. They include, supplies, rent and salaries. In this assumption, the manager at Wyndham will take a look at the company’s indirect expenditure in the past and develop a part of time to cater for the indirect costs. For instance, if Wyndham’s indirect costs amount to $900 each day, and they spend 20 days on this project, the assumed cost for the indirect expenses will be $18000.
Factors determining the level of offer
Wyndham Estate has to take some factors into consideration before making an offer and so that they can determine the level of offer to make. Any residential development being offered in the market has underlying factors that chartered surveyors must explore and disclose to their clients. Some of these factors include;
The amount that similar projects are going for: Residential development is an area that is growing in a fast rate and therefore there are projects that might be equally similar to the one Wyndham Estate wants to invest in. Thus, a research into recent project sales is a good place to begin when determining the level of offer.
The duration of the property in the market: The amount of time the derelict has been on the market should be a key component to consider before determining the level of offer. Typically, (Thomas, et al. 2018) reports that the duration of a home in the market should give insights on how much a client should pay.
Conditions of the property: The derelict state of the property should influence the level of offer given by Wyndham estate. The property is already in a poor state and thus, it provides our client with the room to be flexible with prices as much as possible. Therefore the client can bargain to offer less than the actual building cost which is 950 euros per square meter. If the property was in a better state, the seller would have the upper hand in the sales negotiations. However, as it is in a derelict form, Wyndham Estate has the privilege of being flexible with their offer.
Total building cost for:
- 25 one-bedroom flats: 950 x 50 x 25= 1187500
- 45 two-bedroom flats: 950 x 60 x 45= 2565000
- 10 three-bedroom flats: 10 x 80 x 950 + 760000
- Total cost is 4512500
Therefore, the client can bargain an offer less than or equal to 4512500 euros.
Concerns on accuracy of valuation
Valuation accuracy is an issue that is crucial to investment analysts and property professionals. Accuracy has been an issue that has been subjected to quite a lot academic debate and research recently. Equally, the methodology that may be used for assessing accuracy has received similar attention. There are several major concerns that arise from valuation such as the problems involved in the methodology and concerns of trying to evaluate the link between subsequent prices of transactions and prior valuations.
Chartered surveyors such as RICS have gone ahead and provided guidance on accuracy of valuation. According to RICS, accuracy is termed as the relative closeness that a recorded measurement has to the real measurement. When differences exist between the true measurement and recorded measurement, it results to errors and these differences are also called residuals. The errors themselves are classified into three categories namely, systematic where biases exist, gross when typical mistakes exist and random when the error is neither gross nor systematic. In this case, both Bishopsgate Limited and the RICS chartered surveyors are required to be thorough while also eliminating any systematic and gross errors from the overall outputs.
Where it is possible, we are required to ensure the sufficiency in redundancy when making our observations so as to achieve accuracy in our surveys that can be proven by analysis and measurements of the size and distribution of the random errors. Quantification of survey accuracy requires enough measurement to develop observations that are redundant. This means that, sparing or repeating observations that give room for an average to be developed and the calculation of residuals. Where the observations are not repeated or redundant, the accuracy of the survey can’t be approved.
The gross and systematic errors can be eliminated by checking and calibrating property and equipment before and during their use, (Jen 2020) states that this can be achieved by using surveying strategies and methodologies that have verifications that are self-checking and independent. There exist factors that are taken into account in the valuation of a property such as; the location of the property, the property’s layout, the updates and extensions on the property, internal elements of the property and the property’s aesthetics.
In Wyndham Estate’s case, the valuation is going to determine among other issues, the value of the property in question and it will ensure that the property will be of equal level to the price offered by the client. However, a valuation on the property will not reveal the property’s true state. The valuation does not reveal the issues in the property or the condition of the building. It will also particularly not give a n accurate and clear analysis of the property or give advice on how to repair faults in the property hence the need for a property survey.
According to RICS, a survey will provide Wyndham Estate with accurate information on the costs of the faults and defects in the property and thus, provide for everything needed by the client. Valuation accuracy normally conjures up pictures of empirical research on comparisons between valuation and sales and a variety of valuations on similar property. (Helen 2018) While all valuations contain bias to a certain extent, it is recommended that appraisals have to lie within a certain range, that is, the error margin, so as to avoid negligence in the practice of valuation.
(Brooks 2021) gave the difference between the understandings of valuation variation and valuation bias reporting that, valuation bias accounts for the link that exists between the market transaction price and the valuation, whereas valuation variation concerns the differences arising from valuation given by two or more valuations for the same property which was a cause of concern for Wyndham Estate.
The difference between appraised value and the market price is a crucial factor for the company that according to (Amadi 2020) will need to consider when developing their standards of valuation. We as the advisors, should be in a position to clarify to our client the need for accuracy in valuation. At the same time, it is our duty to do away with any errors that may occur in valuation such as the systematic errors to ensure that our results will arrive at the same value as that done by the RICS chartered surveyors.
Methods of valuation
There are several main methods that may be used in the valuation of property. Valuation of property mainly deals with examining the market value of the property or the value of rent in the property. The methods of property valuation discussed in this paper are ones which give a clear indication on the sale value and those that cater for insurance purposes among others. The methods that are mostly preferred by investors and companies are those that have direct links to the current transactions in the market. Some of the methods of valuation include;
The comparison technique: This method is utilized in the valuation of most common property types such as; warehouses, offices, shops and houses. Ideally, to be able to use this method, the market has to be in a stable condition and multiple sales of properties that are similar in condition, location and size should be present according to (Farkas 2020) Those factors that compare the most should be picked and analyzed and later, there can be adjustments done on the existing differences. For example, in our case, the company is interested in purchasing the property which is a hotel. By adopting this technique, it would mean comparing with other similar hotels with the same characteristics as the ones mention which would prove to be a difficult task. However, if a company can find the comparisons with other similar companies then eventually, there will be creation of market value that can be estimated.
The profits technique: This method could come into application when there are none of neither rental nor sales transactions suggests, (Nick 2018) Typically, it used for businesses that run monopolies and hence, there are no records to compare such as nursing homes. It is quite difficult to find a nursing home that is run in the same manner as another one. This makes it difficult to use the records of one to compare with the other and hence the application of this method. This method can estimate the gross profit of a company and later deduct the expenses incurred during work excluding the payments meant for rent; it provides for a divisible balance, or the amount to be divided between the landlord and tenant for rent and for business running respectively.
The residual technique: This method is applicable in valuation of property that has potential in development like the property in interest of our client Wyndham Estate. The property stated is in a poor condition and in need of development. As it is stated the current lease is expiring and the tenant doesn’t seem likely to renew the deal. The property has a potential for development or a piece of land that is vacant and having its uses shifted to other uses that appear to be profitable. When evaluating the value of land, the development cost and the profit for the developers are subtracted from the value of development. The residual sum arises from the capital spent by the developer on the property while still undeveloped according to (Monika 2017) This strategy however, has proved to be quite inaccurate due to the amount of costs and inputs that are difficult to ascertain, and also possesses a changing tendency.
The contractor’s technique: This a valuation method that evaluates the cost and is sometimes used when investment, profits or the comparative methods cannot be applied. This situation typically occurs when a particular property has a special nature and therefore it means that there are no transactions in the market. Sometimes a property may have specific conditions that hinder any types of transactions in the market and the property is termed as special. This technique analyzes the overall costs of giving an equivalent modern property, and later provide adjustments to the size of the property in question. It is a method that is used as a last resort because it is highly unreliable. This is because the market value is normally provided for by the forces of economics, that is, demand and supply and not by the production cost.
Investment technique: This strategy can be used to find the market value of a leasehold or freehold interest in properties and their potential in future income generation. It is generally used for the main property forms where the landlord is insured with a return on investment on capital cost by the tenant. Applying this technique, the transactions of lettings and sales that are comparable are assed to obtain the revenue. (Laura 2020) states that the profit obtained is later enforced to the rental income in future, which is discounted presently to give the net present value (NPV). This is eventually used as an indication of the premises price currently.
According to my analyses, the property in question by the client can be evaluated by using various techniques as described above. First, the profits method appears to be suitable for valuation of the property. This derives logic from the fact that it is a hotel, that is in a building 100 years old and therefore, finding a similar hotel can be quite task and thus the comparison technique is eliminated. This method is also suitable because there can be no traceable transactions in the market involving such hotels in the recent past. Therefore, it can be stated that the hotel has been running as monopoly and no variables that are comparable are present.
The gross profit of the investment will be evaluated by this method and thereafter any deductions to be made as discussed earlier will be made. This type of valuation helps our client in calculating their profits and also their divisible balance.
Another method that Wyndham Estate would found to be accurate for the valuation of the property is the investment technique. This technique mainly deals with the value of a lease hold or freehold and the potential future income. This means that Wyndham Estate will be able to calculate the amount of income that they expect to gain in the future. It is also a suitable method because, the landlord in this case the company will be insured with a return on investment on capital cost by the tenants. The profits accrued are later enforced to the rental income in future, which is discounted presently to give the NPV. In conclusion, the most efficient way for our client to perform valuation on the property would be the Investment technique. Unlike the profits method, with the net profit value, the investment method edges it and is therefore the most appropriate method.
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