Valuation can be tricky to grasp; homes can be listed for a certain price, market-valued at another, bank-valued at an alternative figure and sold for yet again a different sum.
In this segment, we speak with Chartered Valuation Surveyor, Matt Myers, MAI, MRICS, FIV, RV, who has amassed over 30 years of international valuation experience.
Specialising in the valuation and market studies of hotel &resorts, office buildings and shopping centres, Myers is the Senior Managing Director of South Pacific Property Advisors in Suva.
Here, he sheds light on the nuances of property valuation and Fiji’s recent adoption of International Valuation Standards.
Q: How are property prices determined?
Firstly, valuers do not determine values. Values are determined within the market place, and valuers are market readers, and thus just reporting what the market is doing. On many occasions, I have valued properties for much more than I thought they were worth. Thus the market itself was valuing the properties more than I would have expected.
In transparent markets with sufficient access to sales data, all market participants, such as agents, salespersons, sellers, buyers, and valuers, will have good clear readings of pricing so as to price accordingly. If I want to buy a bag of lollies, it is very easy to see prices at different stores, and most people buying have a good indication of price. However, here in Fiji, getting good market data on houses, is quite difficult. However in more developed markets such as USA, New Zealad, and Australia, a quick computer search provides all details on land area, zoning, and details on the improvements such as size, date built, floor plans, etc.
Q: Why does the value of a valuation come up less than the selling price?
There are many types of valuations that can be done on the same property, such as insurance, rating, compulsory acquisition, financial reporting, rental assessment, and court purpose (e.g. divorce, dispute, etc.), each which may have different values.
Also, the same property may have many rights (e.g. leasehold, air rights, view rights), again each with its own value. Thus, valuers following international valuation standards, first need to determine the purpose, intended use, and intended users for any valuation. That will then guide the valuer on the standards that must be followed to a credible valuation.
Most banks ask for a valuation for secured lending purpose as they seek to use the valuation as a basis of collateral for a loan. International Valuation Standards (IVS) has a specific section for secured lending type valuations, and it is the most demanding in regards to data gathering, analysis, and reporting.
But by definition and under IVS, a valuation for secured lending purposes should be market value, as defined under IVS. However, as a valuer we need to consider what is the likely price the property would sell for if the bank has to resell if they recover the property? An example would be a property that has a higher value as it has above- market lease in terms of rent. This could lead to higher value due to having higher income. However, the bank still wants to know what it would sell for if that tenant moved out and the property was ‘vacant possession’. The value with the above market rent would likely be higher than if valued as vacant possession. How much the bank then lends, is up to that bank who uses their internal criteria on the risk associated with lending on that property and that borrower.
Selling price is what the vendor (selling owner) is asking. Price and cost are not value. A real estate agent’s job is to get the highest price for their vendor and thus they will push for such. Also, many vendors want a certain price, unless they are motivated to sell. Thus, many agents set the selling price where the vendor wants. However, very few real estate agents are trained in valuation, and here in Fiji, currently real estate agents and salesperson don’t have to have any real estate education. Thus, several issues can develop if the selling agent has not done their market due diligence research.
If the vendor is trying to sell, they many not find any buyers at that price, as knowledgeable and prudent buyers would have an idea on the market value. Thus, vendor is frustrated as it is taking too long to sell, and often drops the agent and goes to another agent.
Or, the vendor gets offer from un-knowledgeable buyer, then when the buyer goes to the bank for financing, the valuation reflects the market value. Then, if the buyer did not put in the contract that that sale was contingent on getting financing, they may lose their deposit. And the sale still doesn’t go through.
Although some local real estate agents advertise free market appraisals, under Fiji law ONLY registered valuers can do valuations (or appraisals) of real estate. Appraisal is just another term for valuation. Thus my advice for property buyers who don’t fully understand the local market, BEFORE making a binding offer to purchase, get an IVS compliant valuation by professionally qualified valuer.
Q: Have International Valuation Standards Been Adopted and Put in Place for Fiji?
The Institute of Valuation and Estate Management of Fiji in 2015 brought in an international IVS instructor and did a one day seminar on the standards. In 2016, the Institute officially adopted IVS as the standards for the Institute. Thus, all members that have a practicing certificate, should only be doing valuations that meet the International Valuation Standards.
Unfortunately, the Valuers Registration Board is forced to follow an antiquated law which has yet to be reviewed and modernised to reflect international best practice. Thus, currently there are no clear standards in Fiji that valuers must comply with. However, that doesn’t stop banks – nor even the Reserve Bank of Fiji- imposing strict valuation guidelines on loans intended for secured lending purposes. Many years back in the USA, it was the Bank Regulatory Body that imposed valuation standards.
Although the valuation industry is trying to raise the bar, unfortunately, the users- particularly financial institutions- mostly have staff who are not trained to understand valuations and identify those that are deficient. Overseas, most banks have an in-house risk department that has review valuers on staff to look over reports for compliance and deficiencies. None of the local banks have such a local person on staff that I am aware of.
Q: Do International Valuation Standards affect Fiji properties?
IVS does not affect property values in any way. However, as the overall industry adopts such, and improves the quality of valuations, and availability of market data, then market transparency will improve, leading to less risk in the market. Thus then banks will have more trust in the valuations and likely increase loan to value ratios. Which then ultimately helps the overall economy.
DISCLAMER: The views expressed in this interview are Myers’ own professional opinions, and may not be the same as those of his employer and other professional and statutory bodies that he currently serves on.
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