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WHAT IS YOUR PROPERTY REALLY WORTH?

Valuing a property is an essential first step in sell or buying. Take Care, therefore that you are not misled on this all-important matter. If there is one factor on which estate agents can guarantee that they will encounter difficulties, it is that many sellers will find it difficult to accept the market valuation which they are presented with.

Somehow, 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 have not yet been fully understood, are that we have entered a less buoyant, more stringent era, in which supply in most areas still exceeds demand, and distressed sellers have cause a big drop in average prices. Reviewing the valuation situation as a whole, three different valuation methods are used – and these can give varying estimates.

Comparative Market Analysis

Most good residential estate agents will use the Comparative Market Analysis (CMA) method. With this CMA system 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 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 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 Cost System method

The second valuation method 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 of original costs appreciated (or depreciated) at an annual rate, over the life of the building.

This method 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 Income approach

The third approach, which, like the costing method, is favoured by the accounting profession and the owners of commercial property portfolios and 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 properties. In this system, the owner calculates an average cap rate for properties in the area – bearing in mind that rates vary from district to district.

EXAMPLE

For example, a property valued at R1 million Rand 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, 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. No valuation system can ever be completely correct and a certain reliance on gut feel and instinct is essential.

The Lowdown

However, if a seller or buyer finds that this agent has limited knowledge of valuations and is using thumb-suck assessments, this is very definitely a reason for doubting his competence, If you are dealing with a residential property agent in a big group, ensure 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,

14 Oct 2011 / Tony Clark