In this article we explore the issue of Market Value, the importance of obtaining a proper valuation and why lending institutions on the island are insisting on them.
With the passing of Hurricane Ivan many homeowners found themselves in a position of having to raise funds to complete repairs to restore their homes due to either insurance settlements being lower than they expected or underinsurance. For many this also came as an opportunity to refurbish their homes by building an extension, replacing a leaky roof or upgrading the kitchen.
However, in order to obtain a mortgage or a loan, banks have been asking clients to commission a Market Value appraisal before releasing the funds.
Importance of a property valuation
A report on the Market Value of a property is generally carried out by a Chartered Surveyor and is a necessary report for lending purposes to ascertain the equity or potential equity in the property. The report has many variations dependant on the client’s needs and generally the chartered surveyor commissioned to undertake the task ends up being the ‘eyes and ears’ of the lending institution.
Loan officers rarely see or inspect the properties on which they are lending and rely on the chartered surveyor’s report in order to alert the bank to any problems that may affect the value of the property and the security of the loan.
The valuation prepared by a chartered surveyor can take on a number of variations in accordance with the clients needs, whether it be to ascertain the market value as it stands in its damaged form after Ivan, its predicted market value after improvements, its value if reinstated to pre-Ivan conditions in today’s market or even all three. Whatever the criteria of the client’s requirements, the chartered surveyor is required to carry out a different set of analysis in each and every case.
Methods of valuation
There are three common approaches used to value property; the first is the comparable method. This is where the chartered surveyor searches for comparable sales within a geographical area and time frame appropriate for the type of property. This is not always easy to accomplish on a small island where comparable evidence can display large disparities.
Where a property is a one-off or is unusual, the chartered surveyor must be able to make the appropriate adjustments to allow for any differences – this could include location, market conditions, physical characteristics or other special circumstances.
The second approach is the investment method. This is based on the rental income produced minus operating costs such as insurance, agent fees, void periods and such like at a yield the Chartered Surveyor feels is appropriate in order to reflect such matters as the type and location of the property, its future rental growth expectations, the security of the income generated by the property, the cost of management and repairs.
The final approach is the depreciated replacement cost method. This is generally considered by The Royal Institution of Chartered Surveyors to be a method of last resort, when none of the other methods are appropriate.
This method has been traditionally relied upon in the Cayman Islands and used in particular where no, or limited comparable sales are evident.
This approach examines the rebuilding cost of the dwelling and a number of adjustments are made taking into account factors such as functional improvements, the environment and economic obsolescence.
What happens if the dwelling is uninhabitable?
With the passing of Ivan many homes on the island were considered to be uninhabitable.
In these cases the Chartered Surveyor will be able to provide advice as to whether reinstatement of the dwelling would be economically viable and a study on the client’s alternatives can be carried out in conjunction with other professionals such as architects and engineers.
The market at the moment is an imbalanced one where the housing stock is so depleted from storm damage it has resulted in prices rising from lack of stock and any new high and dry construction is fetching top prices in its category.
In these market conditions again the Chartered Surveyor will apply the relevant adjustments to ensure current market activity is reflected.
In summary each property is different and a good market value report should have considered all of the above factors and a good chartered surveyor should be able to provide a balanced independent judgement of the property in question.
Mina Dixit is a Chartered Surveyor at Deloitte Property Consulting Services. She is a member of the Royal Institute of chartered surveyor with 11 years of experience in private general practice gained in both the UK with a number of prominent surveying practices and the Cayman Islands.
Who they are
Deloitte Property Consulting Services provide a comprehensive range of services including project and construction management, contract and financial monitoring of projects, valuations and appraisals, quantity surveying, property management and insurance claim adjusting services.