The valuation of property is often a contentious issue. Home owners and private sellers often struggle to understand what their properties are worth, which can lead to unrealistic expectations and unsold properties.

It is also important to understand the phase that the market is in. In a declining or stagnant market one must caution against overpricing the property. In a rising market it can also be very difficult to get the right balance between the best possible price and a quick sale.

Overpriced properties can take very long to sell, which can be quite stressful and costly (e.g. if the property is standing vacant and not earning income). On the other hand, in a rapidly rising market it often happens that properties are snapped up within a day or two of being listed. While this sounds like good news, sellers should ask themselves whether the property was not perhaps under priced.

The market value is largely driven by supply/demand and building costs. Building cost is driven by inflation, i.e. cost of labour and materials. Supply and demand is driven by a number of economic factors, such as interest rates, disposable income, etc. Property values usually increase when interest rates fall, as this makes property more affordable and people buy rather than rent, which thus increases demand.

Comparative Market Analysis
Estate agents normally use what’s called a Comparative Market Analysis (CMA) to determine the selling price for a property. This is done by analysing and comparing the property to similar sized properties that was recently sold in the area.

The agent may take other factors into consideration, such as busy roads nearby, the condition and general appearance of the property, current demand in the area, etc. However this is not necessary the most reliable method as the comparative prices are usually based on properties that have previously been sold. This information is obtained from the deeds office but can be 3-6 months old due to the length of time that passes between sale and registration of the property. In a slow or stagnant market there may not be sufficient data to do an accurate comparison.

Sellers need to also be aware that the experience and opinions of the agents can vary greatly. If in doubt, the seller should get a number of agents to do valuations and take the average.

Replacement value
This is the value of the land or erf plus the building cost of erecting a new dwelling of similar specifications. The replacement cost is usually calculated by using the building cost, which for an average house varies between R4000 and R6000 per square metre. You can phone a few builders to determine what the average building cost per m² in your area is. You should also take into account the cost of other improvements on the property (e.g. swimming pool, carport, etc). Determining the value of the erf is a bit more difficult, especially if the area is built up and very few vacant plots remain. You can get a fair idea of what your erf is worth by looking at what similar sized erven sold for in nearby areas. Replacement value differs from the market value - the market value for older homes is usually lower than the replacement value due to lifespan, the cost of needed maintenance, etc.

Insured value
This is normally the replacement value of the dwelling and improvements on the, excluding the value of the land or erf.

Municipal value
The municipal value is used as a basis to calculate rates and taxes. It is meant to reflect the market value of the land and improvements, but is often far lower. This is largely because municipal valuations take place every four years and can thus quickly fall behind the market value. However, if the municipal value is higher than the selling price of the property, transfer duties, estate duties and capital gains tax will be calculated on the higher municipal value. It is therefore very important that municipal values are not ignored and that objections are made within the given timeframe if there are discrepancies.

The bottom line
The market value is ultimately what buyers are willing to pay for a property!
Buyers usually have a good idea of property values as they will have visited many showhouses in the area.
Sellers should therefore do their homework properly and be realistic with setting prices, especially in a stagnant market.