Property Appraisal the integrity element in property purchase
Mortgage Broker Clarence Hiles highlights the importance of a competent Valuation Report in property purchase
Barbados Property News-November 2011
We have all been weaned on the real estate advertising slogan “Location, Location, Location” but when we really assess property purchase, the most important element in the process is a competent property appraisal. If the heart picks the location, then surely the head has to determine the integrity of the purchase and therein lies one of the great enigmas in property purchase – few buyers actually commission a professional report prior to purchase. It seems incredulous, but in the modern world many purchasers underestimate the value of quality professional advice and in the case of buying a home, it could have disastrous consequences.
Of course, most purchasers buy with mortgage funding and have the benefit of an Appraisal Report carried out by the lender’s panel surveyor. After all, lenders are a lot more cautious than buyers, and since they are providing the bulk of the funds they will want to ensure their security is solid for the purpose. The borrower who sees this as a punitive expense has really very little business acumen or business sense. A good comparison in Barbados would be the purchase of a second-hand car. Most Bajans love cars and the thought of purchasing a used car without doing extensive due diligence on its history and current condition would be unthinkable. Buying a property is probably 10-20 times more expensive, yet the same investigation is rarely practiced. We all insist on at least one test drive, but staying at a home you might buy is not an option so a lot more investigation is needed.
Barbados has a mixed bag of Appraisers and Valuers, and in the complex world of property purchase they often serve different masters. After all, the lender’s Valuation Report is for mortgage purposes and while there are common interests, it is for the lender’s benefit. That’s why the lender picks their valuer from their select panel of their approved Appraisers, irrespective of qualifications or experience. The fact the borrower pays for the Valuation Report is an enigma within the lending industry, where all the terms and conditions are heavily stacked in favour of the lender.
A property can also be valued for insurance and replacement purposes, and once again two interests are prevalent. The property owner wants to be fully covered, but many owners do not insure a property to its full replacement cost to keep the premium down. The insurance company appoints their Valuer and assesses their risk accordingly, but they hold all the trump cards if a claim ensures because they will only settle on legitimate valuations. If a property owner insures at 50% of the value of the property, then they can expect their claim to be sliced 50% from the outset. Amazingly many local property owners delight in insurance ‘savings’ on premiums, but will they still feel vindicated should a disaster occur and they need to claim?
Another form of valuation is the investment method. Basically this appraisal estimates rental revenue against capital outlay and tries to assess the viability of purchase as a Return on Investment (ROI). It is probably more accurate in commercial purchases rather than domestic situations and is sometimes well out of sync with market value.
Market value is what you would expect to get if the property was placed on the open market and it provides the one undisputed fact in the process. An agreed purchase price is an accurate benchmark as it is a fact, not an opinion. An Appraiser may question value for money, but the agreed sale price can never be ignored as an indicator of market value.
But there are also many other valuation opinions. Top of the list is the owner’s valuation, then we have the selling agent’s valuation, then purchaser’s valuation and we must never forget the Land Tax Dept valuation, which is used to assess your annual Land Tax. Everyone has an opinion on property values, and there are many interests to be served.
As a property purchaser your interest should be paramount. If you have reached the point where you are very serious about a property then you should engage a competent professional firm to carry out a Homebuyer’s Report for your benefit. Barbados Valuers do not offer a specific Homebuyer’s Report akin to the Royal Institute of Chartered Surveyors in the UK, but it could, and it should. This comprehensive report covers a multitude of considerations and will give all purchasers a comfort zone. The smart owners and selling agents should provide it for a purchaser, but perhaps the conflict of interest might detract from its integrity.In any case, it is time for Homebuyers Reports to become an integral part of property purchase to add integrity to the buying process.
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