Property valuation: Comparison vs cost and depreciation method?

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As a licensed auctioneer, before any auction could be conducted, we need the Valuation Report (VR). A similar unit in the same development does not mean it will have the same valuation as the unit auctioned the month before. In fact most potential buyers will ask for bank valuations before they buy a unit because they did not want to have the possibility of buying a unit with a high price but the bank refuses to lend based on the price because their valuation of the property is lower. Sometimes, renovations may also influence the VR. Recently, there are suggestions that the valuation methodology of using comparison is one reason why property prices are high or inflated. The proposal is to use the cost and depreciation methodology instead. That article for reference in edgeprop.my here.

Now we have the view from Finance Minister Lim Guan Eng. Article in edgeprop.my here. Lim said, “I always hear that there is a difference between the valuation figures provided by the government sector [Valuation and Property Services Department] (JPPH) and the private sector valuers – we need to see how the gap in valuation can be narrowed.” He said he noted the difference is due to methodology being used and that a discussion was needed in order to find an optimal solution. He also said that in some cases the cost and depreciation method may be preferable over the comparison method. He questioned, “The question is why is there always a gap between the government sector figures with the private sector figures?” He hopes there is a transparent standard operating procedure to bridge the value gap. He also said that he understands that valuation gap is common but a 50% difference in valuation figures will give rise to complications, especially in court settlement cases.

During a press conference later, JPPH Valuation and Property director Ahmad Zailan Azizuddin explained on the matter. He said that the cost and depreciation method is usually the last resort used for valuation as the cost of a development does not equal the value of a development. He said, “In Malaysia, what we normally use is the comparison method [for valuation]. What YB Lim suggested – the cost and depreciation method is our last resort. That is because, cost does not equal value. Cost and value are very different from each other. Value is based on transactions in the market, whereas cost are based on facts.” He said the cost valuation may be practical for the affordable housing but the government needs to intervene to ensure a transparent breakdown on the component of the costs from those who built the affordable homes. Article in edgeprop.my here.

I personally would think the comparison method is a much more effective one currently. The reason is because valuation is on the value of the said property and this can only be derived by comparing it to similar properties in the same area. During a short discussion with a few qualified valuers on the same table, they said that if the cost valuation is used, then we must be very vigilant because the items being put into the calculation is still up to manipulation. For example, even the marketing expenses vary tremendously between developers not to mention the other costs such as cheaper or more expensive materials being used. Who will be the one monitoring all these because whatever is disclosed to the valuer does not mean that is the actual material used… I do support that there should not be a gap of 50% between the what valuer A and valuer B says yeah. I think something is wrong somewhere if the gap is too big. Happy understanding.

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written on 1 May 2019 (Yes… working…)

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