Valuation Uncertainty: Common Professional Standards and Methods

Valuation is the process of estimating price in the market place. Yet, such an estimation will be affected by uncertainties. These input uncertainties will translate into an uncertainty with the output figure, the valuation. The degree of the uncertainties will vary according to the level of market activity; the more active a market, the more credence will be given to the input information. In the UK at the moment the Royal Institution of Chartered Surveyors (RICS) has considered ways in which the uncertainty of the output figure, the valuation, can be conveyed to the use of the valuation. The current requirement is for the valuer to ìindicateî to the user of the valuation any ìmaterial effectî of uncertainty on the valuation figure provided. However, an indicative survey of valuers around the UK shows that only a fraction of the profession is following these guidelines as they feel that is lack of clarity. One of the major problems is that Valuation models (in the UK) are based upon comparable information and rely upon single inputs. They are not probability based; yet uncertainty is probability driven. In this paper, I discuss the issues underlying uncertainty in valuations and suggest a probability-based model (using Crystal Ball) to address the shortcomings of the current model and to develop common professional standards and methods for measuring and expressing valuation uncertainty.