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1st February 2023
PROPERTY VALUATION
PROPERTY VALUATION

This article has been prepared to help you better understand what a valuation of property is, why you need to have a valuation prepared, what a valuation will tell you and how to find a fully qualified professional valuer. 



WHAT IS THE PURPOSE OF A VALUATION?



There are many good reasons for having a valuation of your property prepared.



These include:




  1. To obtain a professional opinion of the present value of a home, land, commercial (and indeed any type of) property you may wish to buy or sell.

  2. To obtain any form of secured finance against a property a professional valuation will be required by the lender.

  3. To obtain a professional opinion of the development costs and completion value of the home (or any type of property) you want to build.

  4. To place a value upon land or a site that reflects the development potential of that property.

  5. To obtain a professional opinion of the type and amount of insurance cover required to ensure you are adequately covered in case a claim has to be made.

  6. To verify insurance damage claims resulting from hurricane, storm, fire, rain. and other disasters.

  7. To provide the basis for decision making in the commitment of funds or assets, or maybe gifts, trusts and inheritance matters.

  8. To comply with company law and statue and to become aware of the value of assets for accounting purposes.

  9. To settle disputes in property related or tax related matters.

  10. To determine compensation if affected by Compulsory Purchase or other statutory actions.



WHAT IS A VALUATION?



A valuation is an impartial opinion of the value of property prepared by a fully qualified expert who knows all the factors which make up the current behavior of the property market.  It is an opinion of the value based upon experience and analysis of these factors.  It is an opinion of value which can be substantiated and justified. One must remember that no two properties are the same!



It must be an opinion of value prepared by a recognized professional valuer who has undertaken the minimum requirements of training to gain their qualified status. In Cayman all valuers should have been granted their qualified status by the Royal Institution of Chartered Surveyors (RICS), the world’s most highly respected provider of valuation services.



If a valuation is not prepared by a valuer who is a fully qualified member of the RICS it should not be accepted by any competent Financial Institution and therefore is of little use to anybody.



THE VALUER’S ROLE?



First, the valuer confirms the terms and scope of their instruction with the client to determine the purpose and of the valuation.  Normally this would be in the form of a letter of instruction from the client.  Where a valuation is required for secured lending the lending institution is the client and instructions should come directly from them.



In most circumstances when a bank requires a valuation for secured lending the contract is between the Bank and the valuer and all instructions and correspondence should be between them and not the Banks customer.  The professional valuer is generally instructed to carry out a valuation to ensure that the Banks best interests are being looked after and owes a duty of care to the bank.



An inspection is arranged, and the valuer inspects the exterior and interior of the property, takes measurements, and photographs and makes notes on the general condition of the building.



The valuer may spend only a relatively short time inspecting the physical property, but the main body of a valuer’s work is the research, which will normally be conducted in an office using modern computer software and subscription services.



With the information from the instructions, inspection, and the research the valuer then applies these to his training and expertise to form an opinion on value.



HOW DOES A VALUER ARRIVE AT A MARKET VALUE



For example, location is key to value.  If one were to put an identical development to say The Avalon, Seven Mile Beach onto a beach in the East End, the design and structure of the properties would be the same, but the values would be completely different due to the location. 



Position is important in the same way, for instance a sea view or ground floor unit may be more valuable than an identical size and designed unit in a different position.



Amenities are also an important consideration and affect value greatly. This will apply to both the amenities in condominium developments (such as pools, tennis courts and gyms), but also general local amenities such as schools, shops, restaurants, bars, hospitals, business, and recreational facilities. All environmental factors present in the locality are considered.



The size or area of the property being valued is an important consideration, particularly as most property is assessed upon a value per square foot.  Units within the same development may have differing values per square foot depending on their size, for example one-bedroom units generally sell at a higher rate per square foot than larger units.  Similarly, when valuing raw land smaller plots generally sell at higher rates per square foot than larger parcels of land. There is an inverse relationship between size and sale price whereby typically the larger the sq. ft. the lower the sale rate per sq. ft. and vice versa.  This is referred to as the economies of scale.



The zoning of a property is an important consideration, particularly where raw land is being valued as the zoning will determine what can eventually be constructed on the land and governs important things such as density and height.



Lower lying land may need to be extensively filled at a high cost prior to development and older housing on lower lying land may attract less demand due to the risk of flooding.



The current building code does not set out any binding regulations about building certain heights above mean sea level but strongly advises that ground floor level is above 5 ft to try and combat flooding risk. 



Due to Hurricane Ivan in 2004 prudent purchasers are aware of the problems associated with construction on low lying land and this is a major factor when deciding whether to purchase land or property on Grand Cayman.



The quality of construction is important also as this helps to drive demand.  Good quality materials to modern standards will help to bolster values and modern construction techniques and standards will generally be more valuable than older properties.



The market conditions are also particularly relevant when comparing transactions that have taken place that were not completed at the same time as necessary adjustments will need to be made to account for this.



A general rise in sale prices being achieved in the real estate market since the purchase of a house might indicate a higher value today.  However, the valuer may find that these general increases in value have been offset by depreciation of the subject property due to age, style changes, natural wear and tear or needed repairs.  Additionally, the area in which the property is situated may become more or less desirable over the passage of time.



To form an opinion of market value the valuer must acquire all the facts about the property in question and to do so will need to spend considerable time researching data, collecting information from sources such as the Land Registry, checking comparable sales, talking with local realtors, and accumulating other pertinent information necessary to compile the report.



With this comparable evidence the valuer then makes adjustments depending on all of the factors mentioned above and use their knowledge and experience to form their opinion of value.



Extensive technical training and long and varied experience are required for qualified valuers to complete any appraisal. 



IMPORTANT CONSIDERATIONS FOR THE REPORT



When carrying out a valuation it must be noted that ‘Chattels’ are not to be included in the value.  Usually, sale prices and advertised sales rates through realtors include an amount for ‘Chattels’, Chattels are generally items that are moveable and can be moved from one location to another, for example unfixed furniture, personal goods, artwork, and freestanding electrical appliances.



It is not within a professional valuers remit to value such things and as they can be moved and do not form part of the physical property they are excluded from the opinion of value.



Valuers have access to reliable information on sales which the average owner does not have.  There are many other considerations that may affect the value of property.  Often sales result from speculation, involuntary sale, or other reasons and may well reflect considerations that are not apparent to an unqualified person. 



Normally the Bank will inform the valuer upon instruction on what basis the valuation is required.  Bould Consulting generally includes up to 3 bases of valuation: Market Value, Market Rent, and an Insurance Reinstatement value.



“Market Value” is defined by the Royal Institution of Chartered Surveyors and the International Valuation Standards Committee as:



“The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion.”



“Market Rent” is defined by the Royal Institution of Chartered Surveyors and the International Valuation Standards Committee as:



“… the estimated amount for which a property or space within a property would lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion.” 



An Insurance Reinstatement Cost is the costs of replacing the buildings, generally considering the cost of reinstatement of the buildings only and does not cover for perils such as: loss of rent, income or profit, employer’s liability, public liability, or loss of stock.  Normally it is a condition of reporting the above figure that we assume the building will be constructed on a modern materials basis.  The assessment assumes foundations for average ground conditions and includes demolition and the relevant professional costs to carry out the construction.



It should be noted that there is no direct relationship between the Building Reinstatement Cost of a property and the Market Value of the same property.



ASSUMPTIONS & SPECIAL ASSUMPTIONS



There may be a need to instruct a valuer to report on a certain aspect of a property normally outside of the standard scope of instructions or for special assumptions to be considered when assessing value. For example, a valuation subject to the “special assumption that planning permission for development has been granted”, or the “special assumption that a construction works have been finished”.



In this case the valuer can provide a figure for these assumptions but will make reference to the fact that this figure has taken into account special assumptions so that the person or institution for who the report is addressed is fully aware of such and ideally the special assumption should be agreed by the client. 



A special assumption is defined as an assumption that either requires the valuation to be based on facts that differ materially from those that exist at the date of valuation; or is one that a prospective purchaser (excluding a purchaser with a special interest) could not reasonably be expected to make at the date of valuation, having regard to prevailing market circumstances.



VALUATION MISCONCEPTIONS



A valuation does not necessarily represent the price to be paid for a property.  There are many reasons that price maybe different to value, some of which are:




  • Lack of full market knowledge by a buyer or seller.

  • A lack of inclination to sell or purchase or a necessity to do so.

  • A ‘special buyer’ who may be willing to pay a premium.

  • An agreement between friends and family.

  • Part of a wider ‘deal’ or transaction.



A seller is not necessarily entitled to a profit or even the return of the entire investment when selling a property; sums spent for alterations, repairs or maintenance cannot necessarily be regarded as sums to be recovered when selling.



Often so-called “improvements” or additions to the home do not necessarily increase the value by as much as their cost.  If additions are being added with the intention of adding value, it may be a good idea to consult a valuer to gain their opinion in the first instance.



Cost does NOT equal value.  There is a misconception amongst many people that one can take the cost of a piece of raw land, add the cost to construct the house and this equals value.  This is incorrect.  Market Value is strongly influenced by supply and demand, and it can regularly be a fact that the Market Value will be lower than the cost to buy land and build a house.



It is also a fact that poor market conditions may lead to house prices falling whilst building materials and labour costs do not.  For this reason, the Insurance Reinstatement Cost has no bearing on Market Value.



It is another very common misconception that the more different valuation methods the valuer uses the better.  This is incorrect.  In almost all circumstances every type of property has an appropriate valuation method that suits that particular property.



In valuing residential property, it is highly likely that the best method of valuation will be the Comparable Method whereby sales of similar properties in the locality are analyzed making appropriate adjustments to reflect the differences in position and location, design, condition, valuation dates, etc.



The investment method assumes that willing vendors and purchasers calculate their respective asking and offer figures with reference to the actual passing income of a house, or the ability of the house to generate income.  Expenses are then deducted to lead to a net figure, which is then capitalized, and the resultant figure compared to investment returns from other types of investment.



In the Cayman Islands there are an extremely limited amount of sales of this nature as generally residential sales of this nature would include houses of multiple occupation, designed for such a purpose, where rent is often per room and facilities are shared.  There are also a limited number of buildings housing student and staff accommodation. 



The Depreciated Replacement Cost (DRC) method should never be utilized for residential property in the Cayman Islands, other than when agreed as a Special Assumption (such as for irregular materials).  If this method is utilized in any other circumstance a valuer can be considered to be acting negligently.



It is very important that the professional valuer utilizes the only the best suited method of valuation to carry out the instruction to the client to the best of the valuer’s ability.  It is also very important that the lending institution is aware which method(s) should be utilized as, if the wrong method is utilized, the valuation is likely to be wrong and therefore putting the lending institution at risk.



HOW ARE VALUATION FEES CALCULATED?



It is wise to have an understanding of the valuer’s fees before instructing the valuation and every professional valuer should agree a fee prior to inspecting the property. 



The valuation fee will normally reflect the time it will take the professional valuer to carry out the instruction through to completion of the report.



Fees will vary depending on the nature and complexity of the assignment and the economics of the area including the monetary amount of the property being valued.  Generally higher value property will require more time, be more complex and incur a higher cost of Professional Indemnity Insurance, but with time and complexity this is not always the case.



It should be remembered when considering the fee quote for a valuation that to competently carry out an instruction:




  • The professional valuer accepts liability to his client (normally the lending institution) for his opinion.   Translated, this means that for each and every instruction that is carried out a percentage of the fee will include professional liability insurance.

  • Expensive software programs are normally required to ensure that extensive detailed research can be undertaken within the time parameters of the valuation and indeed in more complex situations for valuation calculations.  It is essential that professional valuers have up to date resources readily available to best carry out their instructions and the cost of these resources is also reflected in the valuation fee.

  • In addition to the cost of the valuer a valuation fee will reflect or specify additional costs to include support and administrative staff and office costs include the production cost of the reports.

  • A professional valuer subscribes to a professional body (RICS) and has to spend time updating his knowledge and skills during the course of each year to ensure that the highest professional standards are adhered to in line with RICS Valuation Standards, these are indirect costs that need to be covered through valuation fees.



So when instructing a valuation it is very important to consider what a professional valuers fee include and the amount of work required:-



ETHICS



Professional valuers are bound by codes of ethics.  Generally, it is unethical for a valuer to:




  • Contract for or accept compensation for valuation services in the form of a commission, rebate, division of brokerage commissions of any similar form.

  • Receive or pay finder’s or referral fees.

  • Accept an assignment to value a property for which employment or fee is contingent upon reporting a predetermined conclusion.

  • Make compensation on any basis other than a fair professional fee for the responsibility entailed and the work and expense involved.



One should not ask for, nor expect a certain valuation figure from the valuer.  A valuation figure is calculated by a professional valuer through research and knowledge of the market and application of valuation standards, a professional valuer cannot provide a figure prior to carrying out the full instruction.  The figure produced is never pre-determined. 



A responsible professionally qualified valuer will never sign a report which does not reflect their best judgment based on the research undertaken and known facts of the instruction.



Of course, you may instruct a valuer to report on a certain aspect of a property normally outside of the standard scope of instructions or for special assumptions to be considered when assessing value. (For example. a valuation subject to the special assumption that planning permission for development has been granted or maybe a special assumption that a construction works have been finished). In this case the valuer can provide a figure for these assumptions but will make reference to the fact that this figure has taken into account special assumptions so that the person or institution for who the report is addressed is fully aware of such.



When carrying out a valuation for secured lending purposes it is important to remember that the relationship is between the bank and the valuer and that the valuer is instructed to carry out the report for the bank.  This is always the case and is not determined by whoever pays the valuation fee.



HOW CAN A BANK BEST PROTECT THEIR SECURITY?



There are many in the real estate business who may call themselves valuers or appraisers, but unless they are fully qualified professional valuers the services provided have no relevance.



A professional valuer must be a fully qualified member of the Royal Institution of Charted Surveyors (RICS) to be able to carry out professional valuations and hold professional indemnity insurance.



The safest way is to ask the valuer what qualification he holds, and which banks or financial institutions accept his reports for mortgage or financing purposes. 



Qualified valuers are obliged to carry professional indemnity insurance by their professional bodies.  You may wish to ask your proposed valuer does he carry professional indemnity insurance and if it is at a suitable level for the instructions you are giving.



To best protect the Banks interest instructions should be made directly with the valuer and all reports should be addressed to the bank and include all the information that the Bank needs.  It is best practice to agree this in writing prior to commencement of the instruction to avoid confusion.  It is normal practice for valuers to produce extra copies that the Banks can provide to their customer if they so wish.  It should be remembered that the valuation report is between the Bank and the valuer only and can only be transferred or relied upon by another party with the consent of both parties.



It is usual for Banks and valuers to have high standards that are updated as new events and regulations occur.  It is good practice to publish guidance to valuers and instruct them of changes and inclusions or exclusions they would like to see in valuation reports.  It is important for both parties to monitor standards to ensure that the Banks security is upheld.



Ultimately, the valuer is responsible for their opinion of value provided to the Bank, but by ensuring that correct methods of valuation are being utilized by all approved valuers, the Bank or lending institution is ensuring best practice and ultimately protecting their security.



Professional relationships with valuers help to ensure that any changes, be it down to new legislation, change of internal policy, market enforced changes or personal preference can be quickly and efficiently dealt with.  It also enables both parties to keep abreast of the changing market conditions and have the ability to be able to react to changes quickly and efficiently.



Call or write for further information:          



 



PO Box 1489



Fourth Floor Genesis Building



Genesis Drive, George Town



Grand Cayman, KY1 1110



Telephone     345 946 6063



Facsimile      345 946 6073



Email:            info@bcl.ky



 

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