Why You should Pay the Valuation Fee

There’s been accusations and allegations, about valuers and financial institutions in particular, fiddling with the amounts as fees for the provision of Valuation services. This state of affairs creates dissonance in the polity and red ocean competition amongst colleagues. A situation that bodes no good for the real estate market. In this post, we take a peek into the issues of fees.

Sample Valuation Report on a proposed building

Need for Valuations:
Valuations are required for various purposes by individuals and corporate organizations: They are needed to produce accurate accounting documents like balance sheets or to set prices on assets that are to be sold. They are also used to determine how much tax is to be paid on an asset by it’s owner and when an owner wishes to challenge the amount of tax he/she is charged. Valuation is also used in the process of right-of-way acquisition and compensation during huge infrastructure projects but also in the routine process of obtaining loans from financial institutions. Consider the case of a trader who needs money to expand his business and presents his piece of land for the bank to ‘hold’ in case he is unable to pay. Banks require such collateral but need an independent expert to determine if the land would generate a sufficient amount to cover the loan if it ultimately had to be sold – here, a valuation is needed.

Why pay fee for Valuation?
A Valuation fee is the payment made to a certified Estate Surveyor and Valuer for valuation or appraisal services. Such a professional applies his/her intellect, training, experience and time to evaluate an asset and estimate it’s market value.
This fee as of necessity contains some element of cost and is often regulated, based on location, type and other intricacies of the asset.

Who pays?
At the base level whoever commissions a Valuation pays the fee. The owner of the asset usually commissions the Valuation and is expected to pay, however, fees in financing transactions are paid by the borrower. In these cases the lender will commission a licensed valuer, with presumably no emotional or financial attachment to the transaction.

Unfortunately, recent events – especially the cry-out by AMCON about the inability to sell off bad loans due to what they attributed to overvaluation – has thrown up some issues that need to be interrogated. How or why should overvaluation be so rampant in such a crucial sector? Were strict compliance to engagement of professionals with proven integrity and no financial or emotional attachment to the transactions not applied? One can only postulate that there exists a knowledge vacuum in the job of Valuation or what the valuer does. This knowledge gap has a huge impact on the quantum of fees paid for such services. So what really does a valuer do?

Work of the valuer:
To arrive at a fair value opinion as a guide to the market price, the valuer, undertakes its work in three painstaking stages:

Detailed inspection is carried out which takes between two hours to three weeks depending on the complexity of the asset, (a home, a factory premises or an industrial complex would take different amounts of time). The inspection is to determine the state, condition and quality of the asset. It may involve cooperation between specialists to carry out integrity tests etc.

Data gathering, analysis and Valuation. This process requires field work to collect, collate data from comparable assets for analysis. The inputs include details on location, footage, accommodation, facilities/amenities and neighbourhood environmental considerations. These inputs are thereafter analysed, checked to arrive at a realistic opinion of value, having applied the technical methodologies and formulas. This stage takes a few hours to four weeks depending on the complexity of the asset.

Valuation report: a detailed report is thereafter composed indicating the process and justification for the derived value. A badly worded or presented report cannot effectively communicate its findings, which will negatively impact the previous process, as such, this stage calls for proficiency.

Appropriate fee payment:
Given the time, experience and expertise required to prepare a proper asset valuation, it stands to reason, that adequate fee payment is the sine qua non for an unbiased professional service. It should therefore be a cause for concern for both the borrower and lender, when valuers accept pittance as fees. Individuals/organizations should be wary of valuers who accept arbitrary or over negotiated fees, that fall far below the regulated fees and the reasonable cost of executing the assignment.

In conclusion, a well remunerated valuation, only strengthens the economy to the benefit of all. It minimizes the number of hard-to-recover toxic loans and improves the confidence level for the profession, thereby creating more briefs, as the society grows to rely on expertise.

PP

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