The value of valuation

BEHIND THE SCENES: Dr Ernest lifts the veil off the quiet valuer profession which has a bigger impact on the property market than meets the eye

For many adult Malaysians, at some point in their journey towards achieving their life-long ambition of buying and owning a property, be it for investment or self-occupation, whether it is a house, condominium, apartment or shop, they will require the services of a valuer.

Who is a valuer? What does a valuer do? Why do I need the services of a valuer? To find satisfactory answers to these questions, let us follow the activities of Ahmad bin Abdullah, an average Malaysian.

Ahmad is married with two children. He lives with his family in a rented terrace house in Petaling Jaya, Selangor. Ahmad and his wife both work, he with an international courier company and she with a Malaysian bank. Their monthly combined take-home pay (after EPF and tax deductions) is RM5,000. Like most Malaysian families, Ahmad and his wife aspire to buy their own home.

In my previous article on the topic “The Malaysian Property Dilemma” (NST RED 6th July 2012), I examined the finances of three Malaysian Families, namely the High Income Family (RM14,000 monthly income), Middle Income Family (RM8,000 monthly income) and Low Income Family (RM3,000 monthly income). I found that these Malaysian Families can only afford to spend monthly RM2,960 (High Income Family), RM1,720 (Middle Income Family) and RM520 (Low Income Family) for their respective housing loans.

Ahmad and his family, with a monthly family income of RM5,000 may be considered a Lower-Middle Income Family. In keeping with the basis I adopted in my article “The Malaysian Property Dilemma”, Ahmad and his wife can only afford to spend RM1,100 every month to pay for his housing loan that enables him to obtain a RM180,000 housing loan (repayable in 30 years). With a RM180,000 housing loan that represents 90 per cent of the purchase price, Ahmad will be looking to buy a RM200,000 apartment in Petaling Jaya.

Armed with that information, Ahmad and his wife went house-hunting. Ahmad’s efforts were complicated by the current high expectations of Sellers (often on the advice of Real Estate Agents) vis-à-vis the prices the Sellers want for their properties. Ahmad and his wife found an apartment in Section 17, Petaling Jaya with an initial asking price of RM250,000. After much negotiations the Seller was willing to sell the apartment for RM230,000. Ahmad agreed to buy the apartment at RM230,000 and paid the Seller a 3 per cent Earnest Deposit amounting to RM6,900 and signed a Letter of Intent with the Seller.

Armed with the Letter of Intent he signed with the Seller, Ahmad went to his regular bank to apply for a housing loan. After all the initial formalities are completed, the bank officer tells Ahmad that it is the bank’s policy to have the property Ahmad intends to purchase to be valued by a valuer on the bank’s panel of valuers. The bank officer also tells Ahmad that the valuer’s professional fees would have to be paid for by Ahmad in advance.

At that point in time, Ahmad remembers that Zulkifli, his buddy from his high school days is a registered valuer and so he requested that Zulkifli’s firm be appointed to value the apartment he intends to purchase. The bank officer politely told Ahmad that his request could not be granted because Zulkifli’s firm is not on the Bank’s panel of valuers.

Lower bank valuation: Ahmad reluctantly agreed for the bank officer to appoint a valuer that is on the bank’s panel of valuers to value the apartment he intends to buy. The Bank Officer also requested that Ahmad pays him the valuation fees and he would forward the valuation fees to the appointed valuer.

About a week later, the bank officer calls Ahmad and tells him the valuer has submitted to the bank his Valuation Report and has valued the apartment at RM190,000. The bank officer tells Ahmad that at 90 per cent of the valuation, the bank can only grant Ahmad a RM171,000 housing loan.

Ahmad is now in a quandary about what to do next. He had agreed to buy the apartment for RM230,000. With the Bank willing to lend him only RM171,000, Ahmad will have to pay the difference between the RM230,000 agreed purchase price and the RM171,000 loan sum amounting to RM59,000. He can only afford to pay an initial deposit of RM23,000 or 10 per cent of the RM230,000 purchase price. He now has to raise an additional RM36,000 money he does not have.

Ahmad and his wife will now have to make very hard choices. They can decide to forego and walk away from their obligations to the Seller per the Letter of Intent, whereupon Ahmad will lose the RM6,900 earnest payment deposit he had already paid the Seller. Alternatively, they can try to raise the additional RM36,000 money he does not have by borrowing from friends and relatives.

Both of these are not pleasant options. The dilemma now confronting Ahmad and his wife is not unique to them. There are tens of thousands of Malaysian families like Ahmad’s who also faced the same dilemma.

Five big questions Malaysian borrowers ask: This dilemma of Ahmad brings to the fore some very interesting commercial and ethical questions that members of the public like Ahmad have been asking since many years ago:

1. Why would the Bank still want to have the property I intend to buy be valued by a valuer when the Seller and I have already agreed on the purchase price?

2. If indeed it is the bank’s policy to have the property I intend to buy valued, why must it be valued by a valuer on the bank’s panel of valuers?

3. Can I appoint a valuer of my choice as long as he is a qualified registered valuer since I am going to be the one who pays the valuer’s professional fees?

4. After the bank’s panel valuer has completed his Valuation Report and I am not happy with the value, do I have the right to appoint a valuer of my choice to prepare a separate Valuation Report to challenge the Bank valuer’s Valuation Report?

5. How is it possible that when two or more valuers are instructed to value the same property at the same time, they produce separate Valuation Reports with the subject property’s value vastly different and the variation can range from 30 per cent to three or four times between the lowest and highest value?

What is property valuation? Property valuation is neither a science nor an art. It is, if you like to put a label on property valuation, part science and part art.

The science part of property valuation involves technical surveys and investigative work that a property valuer has to do to get all the information he needs to have an understanding of the physical and other related characteristics of the property to be valued.

The art part of property valuation involves his skill and experience as a property valuer and how he interprets and analyses all the information he has on the physical and other related characteristics of the property, as well as information he procured on prices recently paid by purchasers of properties in the vicinity of the subject property to be valued, that ultimately leads him to form his “considered professional opinion” on the market value of the property he is valuing.

Property valuation is a profession like the profession of architecture and engineering or the medical or legal professions.

Malaysian valuation profession: In Malaysia, the property valuation profession is regulated by an Act of Parliament, namely the Valuers, Appraisers and Estate Agents Act 1981 (the Act). To practise as a valuer in Malaysia, a person must first posses the required academic and professional qualifications specified in the Act. After having acquired the required qualifications, the candidate must then apply to be registered with the Board of Valuers, Appraisers and Estate Agents Malaysia (the Board) to be a “Probationary Valuer” and to work with a registered valuer who shall be his “Master” for two years.

After having completed his two years of “Practical Training” the candidate must then subject himself to a “Test of Professional Competency” before a Panel of the Board. If he passes the test, the candidate will then be issued with a licence by the Board to practise as a “Registered Valuer” in Malaysia.

In Malaysia, the Registered Valuer is licensed and authorised to carry out property valuations and plant and machinery valuations. On the contrary, in the United Kingdom, Australia and the USA, a plant and machinery valuer is separately trained and accredited from a property valuer. Property valuation and plant and machinery valuation are treated as two separate disciplines in these countries given that the valuation of plant and machinery is a highly specialised field of study that requires distinct and specialised methods to carry out these valuations.

Property valuation profession overseas: Professional practice of property valuation in Commonwealth countries is essentially similar except that in the United Kingdom, valuers are usually referred to as “Surveyors” or more correctly “General Practice Surveyors”. After these valuers (Surveyors) become accredited members of the Royal Institution of Chartered Surveyors (RICS) which is an international professional body based in the United Kingdom, they may then call themselves “Chartered Surveyors”.

In Australia, Singapore and Malaysia, the terminology is similar wherein valuers are typically known as property valuers too. However, in the USA, the term “Appraiser” is more often used instead of “Valuer”.

What is market value? Market value is the main focus of most Real Property Valuation Assignments, where valuers are engaged to develop an estimate of the Market Value of the property in question.

The definition of “Market Value” as adopted by the Board of Valuers, Appraisers and Estate Agents, Malaysia is as follows:

“Market value is the estimated amount for which an asset 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 each acted knowledgeably, prudently and without compulsion.”

What is a valuer’s job? A valuer’s job is to assess the market value of the land (including the building) and all interests bestowed in and on the land at a particular point in time subject to all easements. A valuer does not “create” or “determine” value. Valuers do not pull values out of the air, they read and interpret market sale evidences and accordingly assess the value of the property.

The valuation process: The valuation process in its simplest form may be outlined below as an analytical process not only followed by property valuers, but also by experienced individuals or investors when they are looking at properties to invest, occupy or speculate:

1. Identify and define the property (or Real Estate) to be valued.

2. Identify the particular right or interest to be valued, namely whether to value the freehold interest or the leasehold interest or the sub-lessee interest or the tenant’s interest.

3. The date of the valuation. (This is especially crucial in Land Acquisition proceedings, as the compensation to be paid for the Land that is compulsorily acquired (taken by force of law) is the value of the land as at the date of the publication in the Government Gazette that the land is to be compulsorily acquired. It is also important to note when valuing a property that is the subject of litigation proceedings, the date of the valuation is not the date of the valuer’s appointment, rather it is the date when the cause of action arose, usually many years ago.)

4. The purpose and objective of the valuation exercise and the type of value sought need to be clearly defined. In most cases, it is the “market value” of the property, as defined above, that is required. There are instances when the “Insurance Value” of the Building or the “Value of the Business” within the property is required.

5. The appropriate method of valuation should be chosen and adopted by the valuer for the specific purpose, objective and type of value specified by the client for the property to be valued.

6. The valuer should clearly state in his Valuation Report the Limiting Conditions, if any, that his valuation of the property is subjected to.

Answers to borrowers’ questions
I will attempt to answer the five questions commonly asked by Malaysian borrowers as listed below:

1. Why would the bank still want to have the property I intend to buy to be valued by a valuer when the seller and I have already agreed on the purchase price?

Whilst the bank accepts that the borrower and the seller have agreed on the purchase price, because it is the bank’s money that would be at risk if sometime into the future, the borrower falls on hard times, the housing loan granted to the borrower turns bad and the bank has to sell the property by way of Public Auction to recover its money, the bank would want to make sure that it is not lending more money than it should by having the bank’s panel valuer advise the bank on the fair and correct market value of the property at the time when the housing loan is granted.

2. If indeed it is the bank’s policy to have the property I intend to buy valued, why must it be valued by a valuer on the bank’s panel of valuers?

When a valuer submits his valuation report to the bank, he is essentially saying to the bank “Here is my professional opinion on the open market value of the property. Please trust my professional judgment”. Banks in malaysia generally would want to work with professional advisers, including lawyers and valuers that they are comfortable with especially when the banks are asked to lend and release millions of the banks’ money on the professional advice of the lawyers and valuers. The panel valuer system is created by the banks to ensure that only valuers that the banks are comfortable with are appointed on the banks’ panel of valuers and the banks will generally only accept their valuation reports. There are however exceptions to this general rule. It would be up to the individual bank to exercise its discretion on when to make an exception.

Is it fair for the banks to discriminate against other valuers that are equally if not more qualified than some of the valuers on the bank’s panel of valuers?

I will leave it to the Board of Valuers, Appraisers and Estate Agents, Malaysia and Bank Negara Malaysia to answer this question. The board is the licensing and regulatory body for all registered valuers in Malaysia and all valuers on Malaysian banks’ panel of valuers are also registered valuers under the supervision of the board. Bank Negara Malaysia is the licensing and regulatory body for all commercial and investment banks in Malaysia.

3. Can I appoint a valuer of my choice as long as he is a qualified registered valuer since I am going to be the one who pays the valuer’s professional fees?

Unfortunately, when your individual business is small and insignificant to the bank, you will not be able to appoint a valuer of your choice even when that valuer is very competent and a highly skilled senior member of his profession for as long as his firm is not on the panel of valuers of the bank. However, if you and/or your company is the bank’s “valued customer” and your potential business for the bank is worth millions of ringgit, the bank will likely exercise its discretion to waive the general rule and let you appoint a valuer of your choice.

You will then ask the question that many Malaysians have been asking “Why are big and rich customers of the banks treated differently from the small insignificant borrower like me?”

This is a rhetorical question. Like other similar rhetorical questions being asked all over the world, no answer is expected from the banks.

4. After the bank’s panel valuer has completed his valuation report and I am not happy with the value, do i have the right to appoint a valuer of my choice to prepare a separate valuation report to challenge the bank’s valuer’s valuation report?

As an individual and a member of the public, you have the right to challenge any professional opinion of a valuer vis-à-vis the fair market value of your property or the fair market value of the property you intend to purchase.

However, in respect of the opinion of a valuer who is on the panel of valuers of the bank, if you were to exercise your right to challenge the valuer’s opinion of value, you will likely jeopardise your chances of getting a loan from the bank.

The bank would not argue with you. They will just withdraw their loan offer to you without giving you any reason. It is their right and prerogative to do so.
Where will that leave you?

5. How is it possible that when two or more valuers are instructed at the same time to value the same property that they can produce separate valuation reports with the subject property’s value vastly different and the variations can range from 30 per cent to 300 or 400 per cent between the lowest value and the highest value (at the higher range)?

As i said earlier in this article, the purpose and objective of the valuation exercise and the type of value sought will influence the appropriate method of valuation chosen and adopted by the valuer for the property to be valued.
When two or three valuers are instructed at the same time to value the same detached house in Damansara Heights, Kuala Lumpur, they are not likely to defer much in their respective valuation of the property. They will likely adopt the same method, namely the direct comparison method, for the valuation of the house.

However, when these two or three valuers are instructed at the same time to value a 50-acre plot of vacant land in Kajang, Selangor, these valuers will likely produce valuation reports with vast differences in their respective opinions of value for this land ranging in their differences from 50 per cent between the lowest value and the highest value (at the lower range) to even 400 per cent between the lowest value and the highest value (at the higher range). In absolute figures, Valuer A may value it at RM10 million while Valuer B may value it at RM15 million or even RM40 million.

Can either of the valuers be wrong or can they both be wrong? It is a paradox. The two valuers may both be right! It depends on the basis and assumption of facts and the method of valuation that they each adopt.
Valuer A may assume that the 50-acre plot of vacant land is suitable only for agriculture use with no potential for any form of development and therefore he adopts the direct comparison method to value this property purely as a plot of agriculture land.

On the other hand, Valuer B assumes that the plot of vacant land in Kajang, Selangor has potential for residential development although it is currently vacant. He therefore adopts the residual method to value this property to reflect the property’s potential for residential development.
The resultant values of the property produced by Valuer A and Valuer B will show a vast difference with the valuation of Valuer B ranging from 50 to 400 per cent higher than the valuation of valuer A.

Dr. Ernest Y Y Cheong is a Chartered Surveyor, Registered Valuer, Auctioneer, Arbitrator and Principal of Ernest Cheong PTL Chartered Surveyors.

 

 

 

1 / 3