Desktop or computer assistant programs that automatically determine a value without a physical inspection. A poor valuation method that was utilised for bond purposes.
A valuer that did not do a thorough investigation or market research. Various reasons may be applicable here. It includes the following aspects: Corrupt and other agendas behind certain valuation contracts, especially for municipal valuations. Look out for detailed discussion regarding municipal valuations. The fee that was quoted, was so low that the valuer cannot spend much time on the valuation.
Public is not aware of all the risks here in terms of a desktop valuation.
The fact that the public is not aware or have the knowledge to know the difference between a good and a poor valuation, and the possible financial losses that is connected to a poor valuation that may occur.
Looking at the bigger picture and a previous case when “poor valuation” resulted in huge financial consequences for a client. To avoid history repeating itself it is wise to avoid the desktop valuation. The desktop valuation is not a true reflection of the value of a property – it is an artificial intelligence that acquires data from recent sales, area averages and other listed data. But it is not a true reflection of the value of the property.
Years ago, valuers of the Financial Institutions visited every single property, prior to granting a final bond. Nowadays, more and more desktop valuations are relied on. This deems to be a great concern in terms of accurate valuations to determine the true value of a property. It can be mentioned that the desktop valuation is undervaluing the standard of the valuation at the cost of the potential property purchasers. The financial institutions operate according to their own policies and procedures so it cannot be expected to be cleared out better from that perspective.
Should a financial institution consider to a risk – it has nothing to do with the valuer, purchaser or the owner? It would be the discretion of that specific organisation. In previous times it was safe to accept that should a bank grant the bond it the value of the property would be accurate. That is not the case in modern purchasing environment. The desktop valuation made this inaccuracy worse in modern property purchasing environment and purchasers should become aware of this sooner rather than later.
Further to this please refer to below information from the BOE Annual Report 2001.
History: NBS was one of the largest independent banks in South Africa. Reference to the valuation factor involved.
“The results were adversely affected by a significant increase in provisions against our non-performing loans and properties in possession in the NBS division. Overall provisions for the Group increased by R344 million to R1 390 million, mainly as a result of an abnormally large provision relating to residential property developments and commercial property loans in the NBS division. Arising from an aggressive drive to reduce properties in possession, it became apparent that the valuations placed on our books were not realistic to the market, which called for a detailed investigation into all non-performing advances. The result of this review confirmed that further provisions were required mainly in the NBS residential property development loans and NBS commercial loans in smaller metropolitan rural areas. The bulk of these loans were made in the period between 1995 and 1997. The Group has ceased to operate in these markets. All necessary action has been taken and the Group can now accelerate the reduction of properties in possession at these realistic values”
The logical question would be – How did this happen? What was the real total loss in rand value?
Did the valuers not have the adequate qualifications? Were they influenced by external forces? Who were in charge of this team of valuers? Who authorised the inflated loans? Did anyone take responsibility of this inaccuracy?
The key question should be Was a qualified valuer involved in these valuations?
The desktop valuation method can also be manipulated, but the main reason is that crucial facts that should be taken into consideration to determine the value, is absent. It can be argued that this method, is a time bomb that builds up energy and will explode in future with the trend of pushing desktop valuations, to become mainstream.
It is important to note that the valuation climate has changed drastically over the last few years and even more changes expected to be seen soon. It is now the time, more than ever, to be aware of financial consequences when purchasing a property solely on a desktop valuation.
Technology has made the world smaller and therefore easier to navigate in terms of information creation and collection. A variety of information can be generated and recalled within a short period of time in our modern world. In the valuation industry, technology has contributed to assist a valuer tremendously. There is, however, one crucial aspect that cannot be determined without a physical inspection and that is to inspect the internal areas of a property. This crucial aspect is vastly lacking in the desktop valuation. The desktop valuation still needs to develop in its functionality, in order to accurately valuate the property. As one would imagine, for privacy and security reasons, this data cannot be incorporated in the desktop valuation and therefore deem the complete exercise as inaccurate. Aerial photos can be used to evaluate the external of a property, provided the imagery is updated regularly. But it stands impossible to evaluate the fittings and other crucial information to determine an accurate valuation.
The desktop valuation proves most effective when it is used to valuate a complex that is less than 2 years old and that the probability that the fittings are still the same as when it was purchased. But even with this this instance – there is still a chance of internal damage that cannot be inspected by a desktop valuation.
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