Idiot's Guide To Property Valuation
In the process of buying and selling property, the Value (‘Price’) of a property is one of the most contentious issues that can make or break a seemingly easy transaction. The owner of property is generally more interested in fetching the highest price on offer, whereas the buyer would places the lowest possible amount on the table. Accompanying all these negotiations, is the bank (lender), that is in agreeing to finance the transaction would only do so at a amount that best reflect the market value of the property.
Therefore, the question of what is the ‘true value’ of a property is a conundrum for many, and continues to be a subject of fierce debates. We have put together a series of articles, starting with this one, for the month of August, as part of our efforts to building knowledge around understanding both the terminology and the practices that define the field of property valuations.
"Market value is the popularly known type of property valuation, that is generally used to determine the purchase price and at most times loan value by the bank."
What is a property value (a valuation)?
Property value is an estimate of what a home (a property) is actually worth. Property valuation is a process conducted by a registered valuer to determine (thus provide an opinion of) the value of a property.
Can a property or a home have more than one value?
For most people when talking of the value of a property, what they are actually making reference to is what popularly known as the market value. However, a property does have more than one value. Depending on the reason/s for the valuation request, there are different types of valuation reports (property values) that could result. The method, and process of determining value will be based on the reason for requesting such a valuation or the purpose for which the property is used.
What are the reasons for (or types of) property valuations?
1. Market value (also known as, open market value) is the most popularly known type of value for property, that is generally used for resale (buying and selling) purposes in order to determine the purchase price and at most times loan value by the bank.
The market value is, defined, as an estimated amount at which on the date of the valuation a willing buyer would offer and willing seller would accept, both being fully informed and acting with no undue influences, in an arm's-length transaction for a property exposed for sale for a reasonable period of time in an open market.
Most Estate Agent rely on, and use, the market value as the basis for advising their customers on the most probable listing (buying) price for a property that is ready to be placed (bought) in an open market, especially for transactions where there exist no compulsion to sell or accept buy offers.
2. Municipal Value is the value determined by local authorities (municipality) for the purposes of charging municipal rates and taxes. Rates and taxes are payable to a municipality by all owners of property, based on the municipal value.
The municipality achieves the rates of taxable amount on each property by making periodic surveys (‘revaluation’) of all properties in their jurisdiction at least once in every four years. The Municipal Property Rates Act is national legislation that empowers municipalities to raise rates.
3. In assessing for property risk loss, or home insurance cover, to help in rebuilding or reconstruct a property in case of a loss, the insurance company applies Insurance Value, or what is popularly known as replacement cost valuation. Insurance valuations is an estimated cost of reinstating (or replacing) the property with an equivalent in the event of a total loss.
4. Property value for bank use - in order to protect its interest, the lender will, in all instances, undertake a ‘valuation’ process to assess the market value of a transacting property against the price placed on an offer to purchase in order to determine that there is sufficient value in the property to cover the loan application and that the price offered is a fair reflection of market value. Most lenders would decline a loan application on the basis of valuation, should the price offered be found to be higher than the market value opinion.
Is the market value of a property same as the property price?
The price of a property is an amount at which a property can transact. Generally the price of a property is, at best, a reflection of the bargaining skills between the buyer and seller. Whereas, the market value is the reflection of the overall buying and selling activities in the total market, together with other factors in that locality that influences and have an impact on property values. Therefore, market values are, thus, unlikely to arise from actions of a single person or from one transaction
Article Credit: Mashilo Pitjeng
Bio: Registered Property Valuer. Chairperson Policy and Advocacy SAIBPP. Chairperson Research Committee PSCC. IoDSA Registered Member. Facilitator EAAB CPD Training - Real Estate Environment and Property Valuations. Consults on real estate asset management, property risk solutions, real estate research and transformation.
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