Accurate valuation an essential part of the property selling process

If there is one factor on which estate agents can guarantee that they will encounter difficulties, says Tony Clarke, MD of Rawson Properties, it is that many sellers - “not, thank goodness, all” - will find it difficult to accept the market valuation with which they are presented.

“Somehow,” said Clarke, “a high percentage of sellers are still living in the rosy, optimistic world of 2005/2007 when 20% plus annual increases were still possible. The plain facts that we have entered a less buoyant, more stringent era, in which supply in most areas still exceeds demand, and in which distressed sellers have caused a big drop in average prices, have not yet been fully understood.”

Reviewing the valuation situation as a whole, Clarke pointed out that three different valuation methods are used - and these can give varying estimates.

Most good residential estate agents, he said, will use the Comparative Market Analysis method.

“With this CMA system,” said Clarke, “it is accepted that the market does dictate the price of any product - and it is on the whole futile to deny this. The agent, if he has been well trained, will assimilate as much data as possible about recent sales and asking prices in his area and, in particular, the sales data of homes of a similar size and standard.

“This information enables him to give a more or less accurate valuation on any new property brought to the market.”

The basic principle at work here, said Clarke, is that the purchaser should never pay more for a particular property than he would for a similar, equally desirable alternative property on the market in the same area at that time.

Any current CMA analysis, added Clarke, has to take into account the fact that up to 30% of properties now for sale are there because the buyer has become ‘distressed’ financially and is forced to sell fast, usually at a price that is below the previous market value.

The CMA also takes into account that today’s far tighter lending conditions have temporarily eliminated perhaps 40% of all potential buyers and this situation is likely to continue for another 18 months.

“Obviously under current conditions a CMA is probably the most reliable approach - but it has also to be accepted that no two homes are exactly similar and that a certain home may, for one reason or another, be ideal for a particular family. If that is the case, the buyer should be willing to pay a premium.”

The second valuation method, said Clarke, is the cost system - which is often used by accountants and professional valuers. With this system the current market value of the land will be assessed by CMA but the structure and improvements of the building will be valued on their replacement or original costs appreciated (or depreciated) at an annual rate, possibly related to the inflation rate, over the life of the building.

“This method,” said Clarke, “is especially appropriate where the building has just been completed, or will be completed, in the foreseeable future and an insurance value or an asset sheet is about to be drawn up. It is probably not really suitable if the building is to be put up for sale as the cost system can be inaccurate in assessing what the property would achieve on the open market.

“It also has to be accepted that estimates can vary from valuer to valuer.”

The third approach, which, like the costing method, is favoured by the accounting profession and the owners of commercial property portfolios, looks not at comparative sale (and asking) prices but the income that the property will generate - and for this reason this approach is best suited to commercial property.

In this system, said Clarke, the owner calculates an average cap rate for properties in the area - bearing in mind that rates vary from district to district.

For example, a property valued at R1 million might be producing a rental income of R2 000 per week, i.e. R104 000 per annum. Its cap rate would, therefore, be 10,4% (R104 000 divided into R1 000 000).

If this is agreed to be an accurate figure for the area (after comparing it with the cap rates of other nearby properties), it is then possible to apply this cap rate to other properties to estimate their value.

For example, a property in that area producing an annual rental income of R78 000 would on a cap rate of 10,4% be valued at R750 000.

Clarke said that no valuation system can ever be completely correct and a certain reliance on gut feel and instinct is essential. However, he said, if a seller or buyer finds that his agent has limited knowledge of valuations and is using thumb-suck assessments, this is very definitely a reason for doubting his competence.

“Valuing a property is an essential first step in selling or buying. Take care, therefore, that you are not misled on this all-important matter. If you are dealing with a residential property agent in a big group, check that that group does provide adequate training in this field, and that your chosen agent has access to all the relevant data required to get an accurate valuation of your property.”

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