The accuracy of municipal valuations

Municipal Valuations are not accepted as accurate by SARS (potential tax purposes) and by the SA courts in litigation processes.

Municipal Valuations are based on the Municipal Property Rates Amended Act 29 of 2014.

Municipal valuations have the following characteristics:

1. It is done by using mathematical (regression) models.

2. The valuer does not physically inspect the properties.

3. Because of the above, it is often not accurate.

4. The municipal value may only be used for rates & tax purposes.

The reasons why it is done by applying mathematical models and also not physically inspected are the following:

1. For example, a large city has over a million properties, which a valuation firm must value within a few months. No valuation firm has the capacity to inspect each property and spend a few hours on each valuation.

2. Therefore, the only way to do it is to develop a mathematical model with which a property can be valued within a few minutes and without a physical inspection.

   
   

This is how it is done worldwide, not only in South Africa.

An example of how the mathematical model works in a building with 60 flats:

1. Some flats are 3-bedroom, some 2-bedroom, and some 1-bedroom.

2. There were many recent transactions in which 3-bedroom flats sold for R600 000, 2-bedroom flats for R500 000, and 1-bedroom flats for R400 000.

3. The above information is logged into the mathematical model.

4. If a 2-bedroom flat must be valued, the model will indicate the value as

   R500 000.

Inherent weaknesses of a mathematical model:

1. The mathematical model does not know tenants vandalised the flat and will require R150 000 to repair. Thus, the correct value is R500 000 – R150 000 = R350 000.

2. The more complex the property is, the more inaccurate the model becomes.

For example, a farm is very complex. Even two adjacent farms differ. Attributes such as soil quality, climatology, grass types, the quality and extent of buildings, availability of irrigation water, type of farming enterprise, and so on differ.

No mathematical model can be developed that can accurately consider all these factors.

Different levels of accuracy are required for different purposes

Maximum accuracy required:

1. Preparation for court cases, arbitration, and disputes

2. Purchase, sale, appropriation, and the division of assets

3. Potential tax (SARS)

   
   

Limited accuracy required:

1. Municipal rates & taxes

2. Preliminary investigations

3. Preliminary budgets

Even accurate valuations differ.

1. It is known that valuations done by two different values of the same property differ.

2. The reason is that although valuation methodology is a scientific discipline and process, the valuer has to make subjective decisions during the valuation process, which leads to differences in valuation estimates. Thus, it should differ; otherwise, one valuer copies the other.

3. Much research was done internationally to determine how much an acceptable difference is.

4. For a relatively easy valuation (house), a bandwidth of up to 10% is acceptable.

5. For a complex valuation (farm), a bandwidth of up to 20% is acceptable.

The above percentages were accepted as a guideline in several court cases (jurisprudence) in the UK courts.

Kobus van der Walt

Registered Professional Valuer: Reg no. 7752 BSc Agric-Econ, M.Com (Business Management), MSc (Valuations)