In the process of buying a home and acquiring a home loan, a property valuation makes an integral part of the process. Likewise, existing homeowners might also come across occasions where a property valuation is needed.
Understanding Property Valuation
As property valuation is an important process in both homebuyers and homeowners’ journey, it is crucial to understand the basics of property valuation and its importance.
What is a property valuation?
A property valuation, as the name suggests, is a process to ascertain the selling price or the current market value of a property. There are various reasons to get a property valued in Malaysia, and this can be divided into:
Statutory valuation: Conducted for purposes such as rating, stamp duty, and compensation.
Non-statutory valuation: Conducted for the purposes of buying and selling as well as for fire insurance and home loan application process.
The purpose of a property valuation and its importance
A property valuation is important for both existing homeowners and those who are looking to purchase a property.
For existing homeowners, one of the purposes of conducting a property valuation is to know how much the property is currently worth. For instance, homeowners who have been living in the same property for decades might want to know the exact value of property appreciation, especially if they intend to sell the property. Similarly, homeowners who have renovated their property over time might also want to find out the increase in their home’s value.
Meanwhile, for those who are interested in purchasing a property and looking to apply for a home loan from a bank, a property valuation is key to determine the margin of financing (MOF). The below table illustrates the difference in loan amount that a person is qualified for based on the valuation of the property.
Qualified Loan Amount at 90% MOF
In scenario B where the valuation is lower, there is an additional RM 45,000 that the buyer would have to bear. Through this illustration, it can be seen how property valuation is an important component in a loan application process.
Although valuations are conducted for properties in the secondary market, experts are now calling out for valuations in the primary market residential properties as well to ensure fairer prices for homebuyers and eliminate an overpricing scenario by the developers, as was reported by The Edge Financial Daily.
BOVAEA/LPPEH, which comes under the Ministry of Finance in Malaysia, was established in 1981 with the primary purpose of regulating the valuers, appraisers, estate agents, and property managers in Malaysia. Among the registry that is maintained by BOVAEA/LPPEH is one for valuers, probationary valuers, and valuation firms.
The role of JPPH (Jabatan Penilaian dan Perkhidmatan Harta or The Valuation and Property Services Department)
Another important government body in Malaysia is the Valuation and Property Services Department or Jabatan Penilaian dan Perkhidmatan Harta (JPPH) who is responsible for advising the Federal and State Government, statutory body, and local authority in Malaysia pertaining to real estate and property services valuation.
In addition to this, they also provide information on the details of any sale or transfer of land or buildings. The services are provided either on a special request that is subject to approval by the Director-General of JPPH, on an ad-hoc basis or on a subscription basis. This data is important because recently transacted prices of similar properties in the vicinity can impact a property valuation.
How Does a Property Valuation Work?
For home loan applicants, most banks have their preferred list of valuers on their panel that the applicant can choose from. Regardless of whether you are an existing homeowner or a potential new homeowner, are you wondering what a property valuation process looks like and how does a value end up with the final valuation amount?
The property valuation process
In valuing a property, a valuer takes into consideration several factors such as the condition of the property, recently transacted prices of other similar properties which can be obtained from JPPH, and if there are any renovations done on the property. The details on recently transacted properties can be obtained from the
However, to arrive at the final valuation and the valuation report, there are several methods that a valuer can use, which is explained in detail below.
The different methods of property valuations
Although there are various methods of property valuations, it is always advisable to use more than one method to arrive at a more accurate final valuation. Let’s take a look at these methods:
In this method, the latest transaction price of similar properties is taken into consideration to estimate the value of the property. It is also known as the market data approach and can be used to value houses, offices, and even warehouses. The valuer first searches for similar properties, or comparables, in terms of location and size.
Sales Comparison Method
However, it is not as straightforward as one might think to come up with an accurate valuation, because no two properties are exactly the same! As such, the valuer must be mindful of features such as the age and condition of the property. The valuer should also consider the property’s physical features such as the total square footage of the property and the number of bedrooms and bathrooms. It is also recommended that the valuer has at least three comparables to arrive at a more accurate valuation.
This approach is used for properties that are constructed, instead of frequently sold such as schools and hospitals as well as the value of properties that have benefited by one or more buildings.
Through this method, the cost of constructing the property and the land is estimated. Any depreciation costs are then subtracted. Finally, in using this method, it is assumed that the buyer will not pay more for an existing property than the cost of buying a lot and constructing a comparable property.
The Malaysian Valuation Standards states that there are four methods under the income approach which are the investment method, residual method, discounted cash flow method, and the profits method of valuation.
Through this approach, the relationship between the net income of the property and the rate of return that an investor needs is used to estimate the value of the property. It is typically used for rental yielding properties such as apartments and office buildings.
This method would help the investor to ascertain the net present value of the property by evaluating its future profits and comparable property sales. In addition to these, future properties to be developed are also taken into consideration.
Through this method, the market value of the property is calculated by deducting the development or reconstruction costs and fees and the developer’s profit from the completed developmental value.
Gross Development Value – (Development + Construction Costs + Fees + Profit) = Land/Property
The gross development value (GDV) represents the final capital value of a completed development upon its sale. In using this method, the GDV is based on current values instead of projected values.
The residual method enables the developer to ascertain how much to pay for a site or a building to profit. It will also help the developer to determine how much to spend while developing the property to make a satisfactory profit.
Discounted Cash Flow Method
This is a technique that is used to discount future cash flows back to the present by forecasting the expected future cash flows, establish the required total return, and discount the cash flows back to the present at the required rate of return. The variables in the method include initial cost, annual cost, the holding period of the property, and the estimated income.
Profit Methods of Valuation
When there are no comparable data available on the rental and sales transactions, this is a common method used to estimate both the gross and net profit of a business, based on the formula below:
Gross Earnings - Purchases
Gross Profit – Working Expenses
Although gross earnings and gross profit seem similar, they are not. Gross earnings are defined as the total revenue that a business generates without deducting any working expenses or costs. On the other hand, gross profit is the final financial figure after the business purchase costs are deducted from the gross earnings figure.
Working expenses are the daily expenses that are key for the operation of the business. Examples of working expenses include electricity, water, and telephone. The profit method is typically used to determine the value of food and beverage outlets and hotels.
A Property Valuation and The Market Value of a Property
The Malaysian Valuation Standards defines market value as the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction. This takes place after proper marketing was done, wherein the parties had each acted knowledgeably, prudently, and without compulsion.
What can lead to differences between a property valuation and the market value of a property?
However, did you know that there is a chance that the actual formal valuation from the valuer could differ from the market value or the market selling price? This can mostly be attributed to the fact that the data released by JPPH have a three-to-six-month time delay due to the processing of the information, and valuers in Malaysia typically rely on this data.
The difference is significantly reflected in valuations for properties that have a high demand or during a bullish market environment, where prices can rise quickly and sharply. The difference can also be significant in a volatile market condition.
This can be a problem for homebuyers who have paid a deposit to the seller based on an agreed price. However, if the actual valuation of the property came in at a lower amount, this means that the loan amount granted by the bank would also be lower.
The borrower now has to bear the difference, and if the borrower does not have enough savings or cash and is unable to do so, the earlier paid deposit would be forfeited if the letter of intent has been signed.
Therefore, to protect the borrower’s interest, there should be a clause in the booking receipt that the deposit can be refunded if the borrower is unable to secure a sufficient loan amount.
Alternatively, it is always more prudent to agree on a price after the official valuation is completed by the bank. After all, it is better to be safe than sorry in the long run.
What are the factors that can impact the value of a property?
Additionally, there are other factors that can include the value of a property such as:
Remaining time on a lease
If the said property is a leasehold property, the remaining duration of the lease could have an impact on the value. Properties with a lesser number of years in its lease could have a lower value.
A property that has a strategic location with close proximity to major highways, public transportation hubs, schools, shopping malls, and other amenities will have a higher value. Likewise, a property that is located close to a railway line might have a lower value if the noise from the trains is loud and can bother the residents.
The safety of the location is also another key factor. If there have been a high number of crimes located in the neighbourhood, this could cause a lower valuation.
A property that has gone through major renovations such as plaster ceilings and upgraded kitchen facilities will also have a higher valuation.
Condition of the property
However, at the end of the day, the condition of the said property is also important. A property that may be located strategically or renovated well but is not maintained well could see its valuation being impacted if there are broken structures, peeling paint, and mouldy walls within the property.
It must also be taken into consideration that personal and cultural beliefs may also impact the value of a property. For example, in a predominantly Chinese neighbourhood, a property that is located in front of a t-junction or has the number ‘4’ in its address might have a lower value to the belief that it could bring ‘bad luck’.
Others might not be inclined to purchase a property if there has been a case of suicide or even murder as it could warrant ‘bad luck’ as well.
Through this article, we hope that you have gained a better insight into the property valuation process. Whether you are a new home buyer or an existing homeowner, property valuation is a key term that everyone needs to know.
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