With the accession of Albania on the path of market economy and the return of realestate in commodity, was born and the need to evaluate them. The main basis of evaluation ofreal estate is the market value. There are two the main systems for determining market value,used even in Albania, individual and mass valuation.In the case of individual valuation one or some of real property objects are assessed. This is aprocess widely used in assessing property for mortgages, loans, financial reporting, etc.In mass valuation the main stresses are laid upon valuation of a large amount of property byapplying standardized statistical data processing. The mass valuation is used in Albania forthe purpose of determining the value of property for compensation.The paper demonstrates the relationship and differences between the two systems,focusing on issues encountered in the case of application of mass valuation on land valuationin Albania for compensation purposes. In light of these issues, the paper, gives at the endsome recommendations for improving the current methodology, aiming at determining the fair market value of property for compensation

Arben Dervishaj

Elfrida Alliu-Shehu

Epoka University

1International Balkans Conference on Challenges of Civil Engineering, BCCCE,19-21 May 2011, EPOKA University, Tirana, ALBANIA.Individual Valuation And Mass Valuation. Problems Of TheApplication Of Mass Valuation On Land Valuation In AlbaniaMsc. Ing. Elfrida Alliu-Shehu1, Ing. Arben Dervishaj11Department of Civil Engineering, Polytechnic University of Tirana, AlbaniaABSTRACTWith the accession of Albania on the path of market economy and the return of realestate in commodity, was born and the need to evaluate them. The main basis of evaluation ofreal estate is the market value. There are two the main systems for determining market value,used even in Albania, individual and mass valuation.In the case of individual valuation one or some of real property objects are assessed. This is aprocess widely used in assessing property for mortgages, loans, financial reporting, etc.In mass valuation the main stresses are laid upon valuation of a large amount of property byapplying standardized statistical data processing. The mass valuation is used in Albania forthe purpose of determining the value of property for compensation.The paper demonstrates the relationship and differences between the two systems,focusing on issues encountered in the case of application of mass valuation on land valuationin Albania for compensation purposes. In light of these issues, the paper, gives at the endsome recommendations for improving the current methodology, aiming at determining thefair market value of property for compensation.INTRODUCTIONIn the early `90, Albania experienced major political changes, which were accompaniedby major economic and social changes, spending from a centralized to a market economy.Since 1991, Albania has gone through a long process of land reform and property, whichincluded the revival of the principles and institutes of civil law and their application on realproperty, authorization of trade relations in land and buildings, transfer of agricultural land,residential properties and other commercial and industrial ones to citizens and legal personswith the right of ownership. [1]Incontestable role in the transfer of property to citizens has played and Law on PropertyRestitution and Compensation. The objective of this law (Article 1) is to regulate issues ofownership arising from expropriation, nationalization or confiscation, physical return wherepossible and compensation, where physical restitution is not possible. [2] Is the requirementof this law that the value of the property that is compensated, or is used for compensation hasto be based on market value, according the methodology adopted for this aim. [2]As compensation is typically based on values, there is a need for valuation. At nationallevel, the total amount of compensation is a matter of fiscal opportunities of the country in acertain time, so anything related to compensation, has a high political sensitivity. Theevaluation should be fair, based on the market, otherwise the differences between theproperties with different uses and between different groups of people, can arise. On the otherhand it is necessary that the appraisal not bring negative impact on the state budget. For a2reasonable assessment, for a rapid and fairly reform as a valuation approach is used massvaluation (Mass Appraisal). [3]INDIVIDUAL AND MASS VALUATIONIn the second half of the `90 in Albania it started to be applied the individualassessment, which has assured the application of the market principles in the assessments forloan taking purposes, financial reporting, property sharing and court sessions etc.Decision for approval of the methodology for evaluating real estate that have to becompensated and those that will be used for compensation in 2005, laid before the appraisers,the necessity to use mass appraisal process, because this methodology is based precisely inthe process of mass appraisal. [3]Individual valuation is the valuation of a particular property as of a given date. [4] Incase of individual valuation one or some of real property objects are assessed; consequently,such valuation is distinguished for a detailed analysis and description of the subject property,detailed interpretation of legal and economic factors of value. [5]Mass appraisal is defined as the use of standardized procedures for collecting data andappraising property to ensure that all properties within a group are valued uniformly andequitably. It is the process of valuing a group of properties as of a given date, using commondata, employing standardized methods and conducting statistical tests to ensure uniformityand equity in the valuations. Valuation models developed for mass appraisal purposes mustrepresent supply and demand patterns for groups of properties rather than a single property.[4] Assessing a large amount of property, it is difficult to highlight each of their qualities, sospecial attention is paid to defining what is common to all properties being valued, but not tothe specific features.Having studied the two processes may say that the steps that pursued, the principles ofassessment and the methods of valuation are the same in both systems. [5][6] The maindifferences between those two approaches are in scale and in their handling of market analysisand quality control. If in the process of individual valuation it is important to find at leastseveral comparable objects corresponding to the description of the object under valuation,mass valuation needs greater amount of comparable objects and their diversity in order toapply statistical methods efficiently. Without doubt, the accuracy is greater when is used theprocess of individual valuation. But because the individual valuation takes time and becauseof the bill that accompanies it, its application in cases of valuation for compensation purposesits impossible.International Valuation Standards give the most well-known definition of market value:Market value is the estimated amount for which a property should exchange on the date ofvaluation between a willing buyer and a willing seller in an arm’s-length transaction afterproper marketing wherein the parties had each acted knowledgeably, prudently, and withoutcompulsion [7]VALUATION METHODOLOGY OF BUILDING SITESThe International Association of Assessing Officers (IAAO) and the Appraisal Instituteof Canada recognize the applicability of all three approaches to value for use in massappraisal. Each approach may be appropriate in certain circumstances.  [8]Three classical method of real estate valuation are: cost approach, sales comparisonapproach and income capitalization. Two of them are used in land valuation: sales comparisonapproach and ground rent capitalization.The sales comparison approach is based on a direct comparison of market transactionsof vacant land (for this purpose data from real estate agencies and from the Immovable3Property Registration Offices have to be used.[3]) It is the preferred method of land valuationand probably the only widely used mass valuation method in the context of land. In thevaluation process sales of similar land units are analyzed and a comparison is carried outusing the adjustments. [9]The sales comparison is probably the best way to estimate the land value.Ground rent capitalization is an approach based on annual rental payments, which areconverted into market values through direct capitalization. Ground rent is the amount ofmoney paid for the right to use and occupy the land. This method is useful if an active andcompetitive market for land leases exists. Ground rent capitalization can be used in massvaluation, but is fairly complicated because the rental market is very rarely active andcompetitive. [9]Currently, where there isn't any well-established transaction market of sites, where thedata of the offices for the registration of immovable properties are distorted due to the fiscalevasion and does not exist an active and competitive market for land leases the mostappropriate method applicable is the method based on the construction criteria of land,therefore based in what the site produces. [3] It is an indirect method based on three factors:1. Intensity of construction (I)2. Percentage benefited by building site owners (P).3. Average sale price of buildings (Pm).The intensity of construction (surface unit constructed and surface area of the building)is determined by urban plans and the partial urban studies of the cities or communes, or by theurban regulation and it is the same for all the cities.The percentages benefited by building site owners for effect of making the site availablevary in function of the location/position of the building site and the city where the buildingwill be made. The high percentage value results in the central areas, while the minimum in theperipheral or undeveloped areas or sites close to industrial zones.All the data regarding the above values can easily be obtained by the office forregistration  of  the  immovable  properties,  urban  planning  offices  at  the municipalities  orcommunes, as well as by real estate agencies. According to this method, the building sitevalue shall be calculated according to the following formulaValue of building site = I x P x Pm (1)This methodology is used for calculation of the prices of building sites within theyellow lines of cities or communes. In those zones where the data on the sales price of thebuildings are absent could be used the data from the National Entity of Buildings.In those zones where there is no existing real estate market data on the sales of the buildings,formula (1) is not applicable in calculating the value of the building site. In this case shouldbe used the market value method, which means making reference of the sales prices ofbuilding sites provided by the offices of registration of immovable properties as well as thoseof the real estate offices. In the case of inexistence of this data is used the market simulationand interpolation method.The value of the lands in the suburban zones is 0.2 ÷ 0.5 of the value of the nearestbuilding site zone within the yellow line. In case that with respect to the suburban area wehave to do with building sites zones which pertain to the Communes, the calculation of thesite value shall be made with formula (1).The coefficients are based on real market behavior. There is no reason for using otherfactors, to exclude or include something. In most cases it can be reasonable, but still in somecases from the market circumstances point of view it might be necessary to use some valueswhich is out of given frames (Valuation Methodology).4In valuation, land is divided into value zones. A value zone is an area which has asimilar value level and value formation mechanism. Tirana, the largest city in Albania (31 sq.km )( Fig.1) is divided in 33 zones (Fig 2); other cities in a small number of zones . So,Durres , the second largest city in Albania is divided in 10 zones.Figure 1 Map of Tirana CityFigure 2 Map of Tirana`s values zonesISSUES OF MASS VALUATIONMass assessment is a typical process widely used to assess taxes on property. Althoughit is not used in valuation of properties for compensation, the purpose of evaluation in bothcases is almost the same and consequently the evaluation and expectations are the same. Evenin the case of the use of mass valuation for purposes, the accuracy should be higher. If taxes5are determined as a percentage of property value, the compensation would to be doneaccording the full value of the property, and therefore, the accuracy should be higher.If the compensation is lower compared to market value, people who get the compensation arenot satisfied. If compensation is above the market value it means an unjust decision from thewhole community point of view, because taxpayers have to cover some extra expenses, whichis the result of an incorrect political decision or unprofessional work of appraisers. Marketvalue is not something especially important only in the context of restitution and relationsbetween the former owners who get compensated and the whole community. It is alsoimportant to the owners who get compensated, so in internal relations point of view.The methodology adopted for determining the value of land for compensation purposesin Albania is based on mass valuation.Mass appraisal techniques depend upon the extent and quality of land data available.This information may be quantitative (e.g. land areas, dimensions, building types,accommodation and fittings) or qualitative (e.g. assessment of physical condition, character,or market desirability of structural improvements and classification of submarket groupings)[10].The mass appraisal process must ensure that standards of appraisal level and uniformityare observed in the interests of assessment equity. [10]The term appraisal level relates to the proximity between assessments and actual prices.[10] A ratio study compares the results of mass valuation to market values. [5] Appraisal levelis the overall ratio of values to market values. [5] In mass valuation the results cannot beexpected to equal the market values of individual properties, but high and low ratios should bebalanced. The typical ratio is nearly 1 ( 100%). [5] The measurement of the valuation levelwould require quantitative analysis as a basis to check accuracy. Particularly in the conditionsof cities (the city of Tirana), where there is little or no free land this, this ratio cannot bemeasured and consequently the accuracy of the mass valuation from the appraisal level pointof view, can`t be determined.The term uniformity is a measure of consistency in error ratios. [10] Uniformityrequires equity within group and between groups of properties. [5] Uniformity relates with theeqitable treatment of every individual property.The international documents say that the allowable difference between the results ofindividual and mass valuation should not exceed 20%. [11] The experience of these years inAlbania has shown that the approved prices ( Tab.1) in general did not really match with theprices led by the market. There have been done efforts several times to review the the map ofvalues. In defining the prices it has often been impossible to fully repect the methodology.The coeficents and the factors defined by the methodology are not coherent with those used inthe free market.Table 1  Actual values of land per each zone in TiranaValue ZoneMarket valueALL/Sqm1/1 298291/2 229962/1 1800002/2 1200002/3 376072/4 3771862/5 271043/1 254783/2 215934/1 247544/2 243605/1 1800005/2 1200005/3 318485/4 251896 207177/1 426217/2 376157/3 267877/4 286598/1 385958/2 301118/3 260949/1 422999/2 396139/3 2613710/1 12000010/2 12000010/3 3953311/1 3462811/2 2798111/3 20473PARKU 120000Source. Decision No.1620, 26.11.2008, Republik of Albania, the AssemblyIn cases on no very dynamic markets the update of the values can be done throughindexing and the analysis of the values trend. Another option is to carry out revaluation.Valuation date and revaluation cycle can be handled as components of time dynamics in thecontext of a mass valuation system. In the conditions of our country it is seen as suitable massvaluation to be performed not less frequently than once every three years. [3]Market value reflects real estate conditions at the moment of time in which thisassessment is carried out. Although more appropriate, this practise of updating its values hasdefects comes from the differences in time of valuation, time of approval and entry into forceand the time of its application. If differences in these three time points are greater than valueis likely not to reflect market changes.The first and most important point of integration between two process of valuation,individual and mass valuation, is the development and use of automated system for collectionand processing of the data necessary for valuation. [11] Data collected in a uniform digitalformat is the basic factor of success in developing an automated mass valuation model basedon statistical methods (GIS).Computerized methodology has made the mass appraisal process more efficient andmore widespread.7CONCLUSIONSThe existing valuation methodology was a big step to the direction of market valuebased compensation to the former owners. However, there were some weaknesses in contextof market value in the existing methodology. The existing methodology needed improvementsto reach as close as possible to the market value.System does not follow the principles of valuation level and uniformity.The absence of rules related to time dynamics enables to act in a partial manner,resulting the system to move away from fairnessValuation date is closely attached to the revaluation cycle and has at least two differentsides: a value has to be set using a specific point in time and at the same time a value shouldreflect the present market situation. The valuation results are in force until the approval ofrevaluation results. All new properties or, in some cases, also existing units (appeals forexample) should be valued using the same date with no possibility to consider market changesbetween valuation date and effective date.Analysing the values maps you can realise a big values variation from one zone toanother, even in the areas positioned next to each other. Because values betweenneighbourhoods have to be logical and based on market situation, we think that there isneeded a more studied division of the areas and maybe in a bigger number of areas where thedifferences in values are milder.It is necessary to have a digital data system based on geographical information.REFERENCES[1] World Bank, Tirana (2006). Status of Land Reform and Real Property Markets inAlbania, Tirana: Albania.[2] Law on Restitution and Compensation of Property (No. 9235, dated 29.07.2004),Republic of Albania, the Assembly.[3] Decision on the Approval of the Methodology on the Valuation of Immovable Propertythat will be compensated and of the one to be used for Compensation (No. 183, dated28.04.2005), Republic of Albania, the Assembly.[4] The International Association of Assessing Officers, Property Appraisal andAssessment Administration, Chicago, Illinois, 1990.[5] Glaudemans R. J. Mass Appraisal of Real Property// Chicago: International Associationof Assessing Officers. 1999[6] Eckert, J.K. (1990). Property Valuation and Assessment Administration, TheInternational Association of Assessing Officers: Chicago.[7] International Valuation Standards Committee (2005). International ValuationStandards2005, International Valuation Standards Committee: UK.[8] IAAO, Standard on Mass Appraisal of Real Property, Chicago, Illinois, 2002.[9] Appraisal Institute (2001). The Appraisal of Real Estate, Appraisal Institute: Chicago.[10] Exposure draft of proposed International Valuation application- Mass appraisal of realestate-August 2002.[11] Arvydas BAGDONAVIČIUS and Steponas DEVEIKIS, Individual and mass valuation,Present and future practises, FIG Working Week 2005 and GDSI-8, Cairo, Egypt, April16-21, 2005.

Individual Valuation And Mass Valuation. Problems Of The Application Of Mass Valuation On Land Valuation In Albania

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Individual Valuation And Mass Valuation. Problems Of The Application Of Mass Valuation On Land Valuation In Albania

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