VALUATION INACCURACY
INTRODUCTION
Valuation is the process of
determining the current worth of an asset or company. There are many techniques
that can be used to determine value, some are subjective and others are
objective.
Valuation is also seen as the process
of estimating the market value, insurance value, investment value or some other
properly defined value of an identified interest or interests in a specific
parcel(s) of real estate as at a given date. It is the estimate of the most
likely selling price, the assessment of which is the most common objective of
the valuer. The most likely selling price is commonly termed “open market” or
“market price”. Baum and Crosby (1988) distinguish between two types of
valuation: price prediction to the market or to an individual. Valuation in
this thesis is taken to be the prediction of most likely sale prices in the
market rather than to the individual.
Valuation has been described as the “estimate or
prediction of the most likely selling price” according to Baum and Crosby (1988).
Implicit in the definition is the reason for valuation, which is that of acting
as a proxy for market price or as a substitute for having to sell an asset. The
need for valuation arises from the peculiar nature of real estate and real
property markets which are heterogeneous and imperfect in nature and character.
If the property market were to be perfect and real property homogenous in
nature, there would be no need for valuation (Aluko, 1998).
Property market and real estate valuation practice in Nigeria evolved
through various stages right from independence due to growth and development in
the nation’s economy. Prior to what operate now, and before mid 70s status
symbol and prestige were the main focus of property ownership hence real estate
was not considered as investment opportunity.
Property is now seen as a good investment vehicle
which requires proper pricing so as to ensure that parties involved in any
transaction are not economically short-changed. To achieve economic
sustainability in property transactions requires proper assessment of the value
through accurate valuation.
“The principal issue in valuation accuracy is standardising the
information set to ensure that all Valuers are equally informed. Valuations are
a function of information. The better the information set the better the
valuation.
VALUATION ACCURACY
Valuation accuracy according to Allan
(2000) is the degree to which a measurement instrument gives the same results
each time it is used, assuming that the underlying object/situation being
measured does not change.
“The principal issue in valuation accuracy is standardising the
information set to ensure that all Valuers are equally informed. Valuations are
a function of information. The better the information set the better the valuation.
If a group of Valuers each have a different view of
the market then the distribution of valuations would have a wider variance than
those which are based on similar information. The spread of valuations will
depend upon the completeness of the information set. In fact it is the
difference in interpretation of the information which leads to possible
transactions.” (Brown, 1992). Ajibola (2006) observed that unlike other markets
such as equity and gilt markets, where the market price of security can easily
be determined based on the prices of similar assets traded in the secondary
market, the property market, by nature, is characterized by heterogeneous
commodities coupled with the fact that there is no centralized market for real
property and this makes it difficult to determine the market price of real
property since there are no given prices hence the quest for valuation. In
other words, the property market is characterized by high level imperfection
and this has given rise for variation.
Factors Affecting Valuation Inaccuracy
The following are the
various factors responsible for valuation inaccuracy in Nigeria:
- Lack of market data/evidence
- The use of outdated data valuation
- Client’s relationship/pressure
- Poor skill and experience of valuer
- Imperfect of property market (valuation environment):
- Lack of use valuation standard as reference (valuation process):
- Valuation approach and technique practiced (valuation process)
- Lack of valuation regulation and control framework
1.
Lack Of
Market Data/Evidence: The most of factors affecting valuation accuracy is
lack of market data/evidence. Data evidence is essential information needed by
the valuer. The value of property is defending on the data analysis from the
data evidence. Usually, the analysis of evidence will produce the market value
of property. This factor is including in valuation environment group. Next,
followed factor is information of property characteristics (property’s
characteristic group). This element of information also ascertains the market
value. The aspect consider to the value is age of building, design, material
uses, state of repair, type of being valued and else.
2.
The Use Of
Outdated Data Valuation: The use of outdated data valuation (Valuation
environment) where the data are not compatible with the current market and
effect to the valuation of property.
3.
Client’s
Relationship/Pressure: The Client’s relationship / pressure (Valuation
process) is the interaction between valuer and client in providing the
valuation report. The client’s pressure such as dissatisfaction with the
valuation and threaten the valuer not paying the fees of valuation. Other than
that, the client who familiarity with the property market usually will argue
the valuation working because they know the best value of the property.
4.
Poor Skill
And Experience Of Valuer: The fourth factors affecting valuation accuracy is
poor skill and experience of valuer (individual characteristic). The valuer who
is a fresh graduate had no skill or poor skill than senior valuer. So, their
knowledge about the property market and the familiarity to the property
transaction is less. They had to analyse the evidence carefully to avoid
inaccuracy. Besides that, the fresh valuer would need to do more than one
method to minimise the error in valuation.
5.
Imperfect Of
Property Market (Valuation Environment): Fifth is imperfect of property market (Valuation environment). Property
market usually not static, sometimes it not active, dull or not stable. This
effect to the property valuation as the price would be high or lower.
6.
Lack Of Use
Valuation Standard As Reference (Valuation Process): Last but not
least, lack of use valuation standard as reference (Valuation process). In Nigeria
Valuation Standard; is being use as the guideline of valuation report. The
valuation firm sometimes use it for once or twice only. If there is a new
update of the standard, They did not notice that sometimes there is small
matter overlooked in valuation process need to be consider to avoid inaccuracy
7.
Valuation
Approach And Technique Practiced (Valuation process): Seventh is
Valuation approach and technique practiced are not suitable (Valuation
process). The method used in valuation must be suitable to get the accurate
value. For example, residential property should be value using comparison
method and to get most accurate use more than one method. The combination of
traditional and conventional method is the better choice.
8.
Lack Of
Valuation Regulation And Control Framework: Lastly, lack of valuation
regulation and control framework by local regulatory body (Valuation
environment). The regulatory bodies must play their roles in this profession to
ensure all the valuer in Nigeria
follow their regulation and ethic code conduct of work honestly and
transparent. The valuers need to provide good valuation report for the client
without any misconception of valuation work.
The variance in valuation is
similar to the inaccuracy. The items of variance valuation are also similar to
the factors of inaccuracy. Then, the aspect of experience, education, market
information, valuation standard, time period, source of market data/evidence
and quality of information. So, the relationship between inaccuracy and
variance in valuation can be deemed as the same.
POSSIBLE REMEDIES
The challenge for eliminating the factors
responsible for valuation inaccuracy falls across the academia, the practitioners,
and valuation institution. The academia has a challenging task to improve the
valuation methodology and doing the further research to establish and to
identified inaccuracy occurs, its actual degree and acceptable margin, causes
and possible remedies.
The institutional or university had to working in
close with the RISM for increase the knowledge and experience among the
lecturers and valuers in public and private practices in producing a good
graduate who can survive in business world. Besides that, each state in Nigeria should
establish property data bank to make such data relevant to the current market.
Such of property data bank would assist researcher in producing property market
indices for performance measurement and accuracy test especially in the
application of the investment method of valuation.
From the research some recommendation is the
further research needed about the actual acceptable margin error in valuation
for others properties such as commercial and industrial. These to ensure the
most significance margin error for these properties are same with the
residential or not. Besides that, the research of valuation accuracy properties
in Malaysia
should be done by researcher to known the guideline of accurate valuation.
Lastly, research of market data/evidence plays important roles in valuation
must be done by researcher to identify how much the market data or information
in producing valuation report.
Hope the others researcher can continue the
research as the profession of valuation move forward and become more
challenging besides need for wider research on the subject matter.
By looking at the overall factors affecting valuation
inaccuracy, the growing concern over valuation inaccuracy still weak. The
potential of the issue bring forward is considerable and far to success. The
awareness among of the valuer about the inaccuracy still low and they did not
notice almost often this happen to them. By differing the valuation of the same
property of different valuer, realize that the variance and inaccuracy occurs
in that report.
The root of this problem is comes from various
challenging faced by the valuer in 21st century. The valuer need to face the
client manner and other matter related to valuation. The valuers need to be
more flexible, creative, innovative and knowledgeable to handle the problem.
Only the good valuer can be survive in this profession as the pressure of working
always had. The possible of remedies suggested hope can be the best way to
overcome the problem before getting worse.
All recommendation action suggested from the
researcher which is doing the further research on the commercial and industrial
properties and defines the acceptable margin error for both properties. Then
the overviews of valuation accuracy in Malaysia and the actual degree of
level accuracy suitable can be use in valuation.
Finally, as the result the responsible bodies
must collaborate together to overcome the problem with had a cross
fertilization of ideas in handling the issue. The profession is moving forward
as the sector of real estate increasing day to day and the economy growing
faster in this country. If too much inaccuracy happens, it would effect to the
property market sector and make the economy of country downturn.
REFERENCES
Adegoke, O. J. (2008).
Valuation variance in unfamiliar locations and the significance of caution in
valuer
behaviour. The estate
surveyor and valuer, Jounal of the Nigerian Estate Surveyors and Valuers, 31(1),
7-13
Aluko, B. T. (1998). Property
valuation: Are estate surveyors and valuers interpreters or creators of
values?. The Estate Surveyor and Valuer, Journal of Nigerian Institution of
Estate Surveyors and Valuers. 21(2), 9-17.
Aluko, B. T. (2000). A study
of appropriateness of mortgage valuation for institution lending in Nigeria.
(Unpublished doctoral
dissertation). The Department of Estate Management, Obafemi
Awolowo University,
Ile-Ife, Nigeria.
Baum, A., & Crosby, N.
(1988). Property Investment Appraisal Routledge (pp. 708-726). London: Routledge.
Brown, G. (1985). Property
investment and performance measurement: A reply. Journal of Valuation, 4, 33-44.
Ogunba O.A. and Ajayi, C.A. (1998) An Assessment of the Accuracy of
Valuations in the Residential Property Market of Lagos The Estate Surveyor and Valuer;
Vol.21, No.2: Pg.19-23
Ogunba, O.A. (2004) Implementation Hurdles in the Search for Rationality
in Investment Valuation in Nigeria
Journal of Property Research and
Construction (1) 14-28.
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