Assessing what a home is worth can be complicated

BY BONNY FOURIE bronwyn.fourie@inl.co.za

There is often a yawning gap between the market and municipal values of the same property. Experts explain why

PROPERTY values are often a contentious issue, not only insofar as how rates are calculated but also the price a home sells for and what a buyer might be prepared to pay for it.

There can also be differences in the value assigned to a property by the local municipality and the value given by an estate agent.

Erwin Rode, managing director Rode & Associates, says in terms of the Municipal Property Rates Act, the municipal value of a property must reflect the market value. However, as these are mass valuations, one would “not expect an accurate estimate at all times”.

Residential estate agents arrive at their valuations by gut feel which, he says, could result in fairly accurate value estimates if they have been specialising in a particular area or they use comparable sales as a guide.

“Often, they use a combination of the two.”

How closely aligned the market and municipal valuations are depends on a few factors, Rode says, one of which is the quality of municipal valuations.

“These are often far below market value because the valuer wants to avoid appeals against the valuations. An important metro in the north of South Africa was a case in point until its latest general valuation, when this discrepancy was set right.

“Also, where a valuation is done by an outside firm, the municipality’s supply chain committee normally has no experience in valuations and tends to award the tender to the cheapest bid.”

The quality of the estate agent’s valuation is also a factor to consider.

“Valuation is not an exact science and even where both the municipality – or its outsourced service provider – and the estate agent are competent, differences in opinion are inevitable.”

The neighbourhood in which a property is situated has a significant impact on its value.

David Jacobs, Gauteng regional sales manager for the Rawson Property Group, says agents arrive at their valuations via various means, the most important of which are:

• Size of the property.

• The property’s fixtures and finishes.

• The property’s location – proximity to schools, public transport routes, hospitals, police stations and other amenities.

• Comparative market analysis.

“Estate agents’ values are determined by a physical viewing of the property, and the understanding of the property’s offering, combined with a comparative market analysis, whereas a municipal valuation is not based on a viewing but on a standard number of square meterage and does not include the quality of furnishing and fittings.”

Jacobs says that, more often than not, the real estate valuation is “slightly higher”, as it takes into account more of the property’s characteristics than does the municipal valuation.

Echoing this, Kgomotso Sebakwane, head of analytics and valuations at FNB private bank lending, says municipalities do not have the luxury of visiting homes individually to measure the size or number of bedrooms or judge the quality of the finishes inside them.

“Municipalities use the data sources of sales available to them and apply an average property rate to each property within a suburb. And so the average homeowner will find that their property’s market value can be very different from the municipality’s.”

An estate agent, on the other hand, has access to the property data in the suburbs that they operate in and, as part of their work, they intimately understand the characteristics of a home, whether it’s the size of the kitchen, the number of rooms or the quality of the finishes.

“Given that they observe what people are willing to pay, they have the ability to gauge the value at which a property will sell,” Sebakwane says.

What factors determine value?

FOR RESIDENTIAL property, the most important drivers of value are location; floor area; quality or age of the building and finishes and the condition of the building, says Rode & Associate’s Erwin Rode.

Negative factors include noise, for example if the property is near a busy road or under the flight path of an airport.

“Location would include the local crime situation and proximity to work opportunities. In low-cost areas, one presumes proximity to reliable public transport is also a factor.

“When using the comparablesales method it is, of course, crucial to use sales that are truly comparable.”

The neighbourhood makes a “huge difference” to the value and growth prospects of a property investment, Rawson’s David Jacobs says, adding that proximity to schools, public transport routes, hospitals, police stations and other amenities is also considered.

“This is usually incorporated when an agent does a comparative market analysis”

Factors that can drive down a property’s value include the quality of the property’s infrastructure – such as if it is old and unmaintained and needs a lot of work, or situated in a notorious neighbourhood, an inconvenient location, a remote or crime-filled area or even on a busy road with constant traffic noise.

“One thing modern buyers are unwilling to compromise on is security. If there is no basic security, or the security system is not up to date, that can also contribute to lessening the property value,” Jacobs says.

The factors that contribute the most to a property’s value, though, says Kgomotso Sebakwane of FNB, is the amount of living space available.

“Different people value different things, but having the option of an extra bedroom will always add value.

“Beyond just the pure functional aspect of a home, the quality of finishes adds extra appeal to a property.”

Any major structural or cosmetic defects, however, detract from the property’s value.

“Whether it’s a crack in the wall, rising damp or peeling paint, the potential home buyer lands up staring at a potential problem that they will need to fix.

“Whatever the quoted cost of repair, the potential home buyer will always subtract more from the value of a property based on the uncertainty of even more repairs. People tend to double discount when they see anything wrong.”