Reporting of uncertainty and risk in property valuation

Real estates are valued all the time in order to give buyers, sellers, lenders, and investors decision support for various situations. The property sector is the Swedish banks' biggest borrowers and properties are often used as collaterals against loans. That is why it is so important that the valuation of properties is done correctly. The most used method to valuing investment properties is to discount future cash flows. But predicting the future is always associated with uncertainty, and the heterogeneous properties are associated with risks. This study will therefore treat the need for a clearer description of the uncertainties and risks associated with property valuation. The study is based on literature and previous research, which forms the theoretical framework. Where three main categories, proposed by the RICS, for how risk and uncertainty can be presented in fairness opinions are explained. The three recommended categories for presentation are: verbal, ranking, and statistically.In order to achieve the desired result a qualitative method has been used, in order to bring deeper understanding and greater knowledge of the researched subject. This qualitative approach was accomplished by an interview study with semi-structured questions to appraisers, real estate companies, and banking institutions. The respondents were divided, based on duties, in two subgroups: providers and clients. One problem that we wanted to answer with this study was how the need between these groups differed. The results showed that it did not differ significantly, but the need increases and decreases for both groups when specific types of properties should be valued and in special situations. One of the main causes, creating uncertainty, is costs based on average assumptions which affect the net operating income and thus the value of the property. The result shows that there is an interest for a standardized method regarding the management of risk and uncertainty. However, there is a great skepticism in how the realization of such a method would be done. Which partially can explain why such methods have not been developed. At the same time, providers and clients of valuation reports believes that there is enough information and that they have the knowledge required to make their own conclusions about risk and uncertainty