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Misunderstandings Encountered in the Property Valuation Process

Misunderstandings Still Encountered in the Property Valuation Process

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The recent fires in the Western Cape – and, prior to these, the flood disasters that hit the agricultural community in 2011 when 8 of the 9 Provinces in South Africa were declared disaster areas by the SA Government with corn, soybeans and wheat the main crops affected, once again focused attention on the dangers of not understanding the nature of the insurance taken on properties (or other assets), says Gavin Commins, the CEO of The Valuator Group.  (This company has 20 professionally qualified valuers operating countrywide and together they have 320 years of valuation experience.)

“There is often,” said Commins, “a fundamental misunderstanding about the insurance cover required – as one example there is a significant differences in the replacement value of a property compared to the current market value”.

In the fire and flood scenarios mentioned, said Commins, all too often it was found that the properties or the assets had been seriously undervalued and this in many cases caused severe hardship to the owners. When a property is insured for its replacement cost, said Commins, it needs to cover all costs associated with replacing the property including demolition and site clearance (if required), professional fees, building costs including escalation amongst others.

The price attached to these services, said Commins, may well be very different to the price the property would have attained if sold on the open market (willing buyer & willing seller) at the time of the disaster.  If the market (as at present) was buoyant, the property insured for today’s market value might well be valued far above its replacement cost.  If on the other hand the market is struggling, the market price might be well below the replacement cost.

Giving as an example one of the most luxurious and attractive homes in the Hermanus golf course estate (in Hillside Village), Commins said that its replacement cost today might be R10 million, but its market value could well be close to R20 million.  From an insurance perspective owners need to ensure that they are covered for the replacement value and this requires a professional Valuer’s input and expertise.

The Valuator Group, said Commins, has found a niche in the market place to offer an all-inclusive service to clients covering many specialized assets over and above property. “We target high net worth clients and their businesses but also do a lot of Government work where our specialist services are required” confirmed Commins.  Insurance brokers, said Commins, are our best clients as they want to avoid potential conflict down the line with their clients due to under or over valued assets.  We work directly for many brokers or often are put in touch with the client by brokers so that we can meet and understand exactly what the broker/clients requirements are to ensure that assets are accurately valued for insurance or market purposes at all times.  This is where the expertise of a professional valuation company like The Valuator Group is so important.

“Although Valuers may be approved associated members with the SA Institute of Valuers or SA Council for the Property Valuers Profession, our experience is that it seldom pays to allow, say, a residential expert to value a commercial or industrial property. Qualified Valuers need to have the required experience in valuing different types of properties.  A really good firm will have dedicated Valuers focusing on these fields to the exclusion of other fields.”

The Valuator Group, said Commins, has over the years broadened its services to cover not only properties but also plant, machinery, equipment and technical assets, fine art, antiques & contents, luxury boats and may other specialized assets.

Asked what assurance a person contemplating using a professional Valuer has regarding the competence of such people, Commins said that qualified Valuers have all spent three years working to obtain the diploma/degrees recognized by the South African Institute of Valuers and the South African Council of Valuers, after which they still have to undergo a two-year mentorship in the firm that employs them.  Thereafter, as indicated, the Valuer will probably focus on one or two specialist fields in the property sector.

“The importance of gaining experience in this work cannot be over-emphasized”, said Commins, “and that is why a really well qualified mentor can make all the difference to an up-and-coming Valuer – and the importance of being able to pool and use other people’s experience in one firm is what establishes a good reputation.”

Costs are often viewed by clients as a “grudge” cost but if analyzed for all the right reasons why accurate values are important to any individual or company, the overall benefit is worth the cost.  To assist clients, said Commins, The Valuator Group offers its clients a five-year agreement in which the value of the property and/or the business and other assets is reviewed and updated annually.  With this system, he said, the client by the fifth year will be paying less than half his first year’s fee because the bulk of the research has already been done – and the client will have the satisfaction of knowing that the valuation is wholly up-to-date year after year giving peace of mind to all concerned.