‘PURPOSE’ IS THE FOUNDATION OF A GOOD VALUATION

Posted on: November 8th, 2018 by Pamela Makhubela

The valuation of immovable property takes center stage in today’s real estate market. Ideally, property owners should at all times be aware of the current value of their property. That being said, many owners believe that it is adequate to formulate their own “informed guess” as to the value of a property, based on their estimation of inflation over previous years, and what a neighbour’s property sold for.

Much more is at play, however. When a valuer is instructed to deliver a formal valuation report of a property, the purpose of the valuation becomes a fundamental consideration. In the next few paragraphs, we will take a closer look at some of the common purposes of valuation.

Purposes for obtaining valuations include:

  • Purchase and sale

When property is bought or sold, the seller usually knows at what price he or she wishes to sell the property. This value is, in a large majority of instances, informed through a consultation between the estate agent and seller.  However, in the negotiations leading up to the sale, the buyer and seller often do not know at what price to reach agreement, especially in large transactions. The services of an independent valuer can then be called on to assist either or both of the parties. The valuer’s recommendation, especially when fully motivated in a written report, often plays an important role in bringing about an agreement between the buyer and seller.

  • Mortgages

There are various financial institutions that lend out money against immovable property as security. When property is purchased, the loan is based on a percentage of the purchase price, or the value of the property, whichever is the lowest. Financial institutions use valuers to determine the value of the properties against which the amount of the loan grant is determined.

  • Assessment rates

Rates and taxes are one of the main sources of income of local authorities and the amount thereof is based on the valuation of the relevant immovable property. It is the duty of the appointed municipal valuer to value all properties falling within the jurisdiction of the specific municipality and to compile a valuation roll reflecting the valuations. Should a property owner wish to object to the valuation of his or her property, it should be done with an understanding of the purpose of the valuation made by the municipality and the data used to reach that valuation.

  • Insurance

Immovable improvements on land are usually insured against damages, destruction by fire or acts of God. The insured amount is the replacement cost of such improvements and the cost is often determined by a valuer appointed by the respective insurance company.

A municipal valuation and a valuation for financing (as discussed above), for example, have different purposes and will reflect different values. So too will a valuation for insurance purposes differ from the valuation reached for the sale or purchase of a property.  Therefore, when instructing a valuer, it is of paramount importance that the property owner is generally informed of aspects that affects his property. He or she should at all times be able to articulate the purpose of the valuation.

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