BASIS AND PURPOSE OF VALUATION

INTRODUCTION
The purposes of valuation do have bearing on the basis of valuation. Market value is the general basis or medium of valuation and the unit, standard or common denominator for measuring other value concepts. However, there are specific cases where the purpose of valuation will dictate other basis of valuation. For example, in valuation for insurance this requires the equivalent reinstatement of the property as the basis of valuation.

Appraisal in investment decision requires, in addition to market value of the project, cost estimate (gross development value) of all inputs –cost of construction, land, professional fees, and cost of finance. In compulsory acquisition or revocation of rights of occupancy, the basis of valuation depends on the enabling statue. In the UK it is commonly open market value. In Nigeria, the enabling law, Land Use Decree of 1978 provides as basis of assessment, equivalent reinstatement (depreciated capital value) of unexhausted improvements. Taxation law may specify a basis of assessment, different from market value. 

In property rating, net annual value is specified as the basis of valuation. Statutory valuations specify and define the basis of valuation authorized by the statutes which may be different from market value and should be adopted.


The basis of valuation identifies the value concept that suits the purpose, while the method of valuation provides the mechanism of expressing this value concept in monetary terms.

OBJECTIVES

The unit objectives are to:

• Examine the basis of valuation 
• Consider the purposes of valuation 

 Basis of Valuation

Basis of valuation defines the value concept which satisfies the purpose and solves the problem posed. Basis of valuation is defined by the valuer. The purpose and basis of valuation are not always the same, and need not be. If for example, a client requires the valuation of his property as collateral for a loan, the valuation is required for mortgage which is the purpose.

What value concept satisfies that purpose? As collateral, the mortgagee must naturally, except the property to secure the loan and loan repayment. In case of foreclosure of the mortgage, the mortgagee has the right to sell the property and would expect the sum realized to cover the loan or any such amount outstanding at the time of sale. Market value, which represents what the property will realize on sale under open market conditions in the case of foreclosure, therefore, provides the value concept that satisfies the requirement of mortgage transactions.

If the client wants to insure the same building, the purpose of valuation is for insurance and different sets of criteria will apply. Insurance cover secures the reinstatement of assets assured, in case of damage or loss. The basis of valuation in such circumstances would be the equivalent reinstatement of the property. If the same property is compulsorily acquired by government, valuation will be for the purpose of determining the compensation payable. The basis of valuation will be as provided by the enabling statute.

SELF ASSESSMENT EXERCISE 1
Mention the basis of valuation of the following: petroleum products filling station, hotel, agricultural houses and farmland.

Purpose of Valuation

The purpose of valuation plays an important role in the choice of valuation method to be adopted in valuing a property. The main reason for this is that it will afford the valuer to arrive at a reasonable market value for the property being valued. The client normally determines the purpose of valuation because he is the one that wants his property valued and he is therefore in a better position in deciding what the report will be used for. After the valuer has known the purpose for which the valuation is required, he may now decide on appropriate method suitable for the valuation exercise.

The following are some of the various purposes of valuation:

1. Sales/purchase: Appraisals are used throughout the fields of business and finance, where it has important applications in the sale and purchase of property; in mergers and exchanges; in mortgage and stock financing and in sale-leaseback transactions. A valuer is always called upon to determine the amount a property would go for in the property market when one needs to buy a property, one needs a valuer to be able to determine if the asking price is too high or too low. This purpose of valuation influenced the choice of the comparison method and/or the investment method. The contractor’s method will become applicable where the property in question is the type not normally available in the property market or sited in an isolated neighborhood. 
2. Taxation: A valuer may be called upon to determine the amount of tax to be paid on the property valued. The levy includes tenement rate, capital gains tax, and property rate. The various methods are the rental method (which could be direct or indirect), profit/account method and the contractor’s method. 
3. Probate purpose: in the event of the death of someone whose property is to be inherited by his heirs, the legal position is that a tax known as estate duty or capital transfer tax has to be paid before the court of law can issue a letter of administration with which such heir apparent could now assume ownership and control of such property. 
4. Insurance: the insurance world is all about risk management. Such risks may be either in business, investment or even in the personal life of the insured. The basis of valuation for insurance purpose can be broken into two namely: reinstatement and indemnity. An individual who wants to insure his property requires the help of a valuer to determine the insurance value. 
5. Rental valuation: the valuer is always called upon to determine the amount of rent to be paid on a newly completed property because the owner is not sure of the amount and he does not want to be cheated. 
6. Redevelopment/Investment Decision: some property may need to be renovated or redeveloped altogether. The reason a valuation will be carried out may be because a property is not being used for its highest and best use. The property must have latent value, which can be released through renovation or redevelopment activity. 
7. Accounting: a valuer may also be called upon to assess the worth of a company’s assets especially real estate assets and plant and machinery. It could be for balance sheets, liquidation and/or partnership. 
8. Mortgage: valuation may be required for the purpose of mortgaging of property. The lender was to be sure of the adequacy of the collateral in case of default. 
9. Litigation: This consists of condemnation or compulsory acquisition, injurious affection, valuation in fraud cases, valuation in the division of property under terms of a will, divorce proceedings or between rival claimants. 

SELF ASSESSMENT EXERCISE 2

• Enumerate the purposes of valuation. 

 CONCLUSION

We have attempted to look at the basis and the purpose of valuation, their interrelationship in the determination of value of the property.

SUMMARY

Different basis of valuation have been examined and various purposes of valuation in this unit for better understanding in the adoption of appropriate method of valuation.

 TUTOR MARKED ASSIGNMENT

• With the aid of examples demonstrate your understanding of the basis and purpose of valuation of properties.