By Ernest Cheong
For many adult Malaysians, at some point in their journey towards achieving their life-long ambition of owning a property, be it for investment or for self-occupation, whether it is a house, condominium, apartment or shop, they will inevitably require the services of a valuer.
Who is a valuer? What does a valuer do? Why do I need the services of a valuer? To find satisfactory answers to these questions, let us follow the activities of Ahmad Bin Abdullah, an average Malaysian who aspires to own a property. Ahmad is married with two children. He lives with his family in a rented terrace house in Petaling Jaya, Selangor. Both Ahmad and his wife work; he, with an International Courier Company, and she, with a Malaysian Bank. Their combined monthly income (after EPF and Tax deductions) is RM5,000.
Can Ahmad and family afford to buy their dream home? To answer this we must first acknowledge that Malaysian families are broadly categorised into three income groups: high-income with more than RM14,000 a month, mid-income with approximately RM8,000 a month, low-income with RM3,000 a month.
Based on 2014 figures on family income and expenses (before GST implementation), let us look at the fortunes of the High Income family earning RM14,000 monthly, Middle Income family earning RM8,000 monthly and Low Income family earning RM3,000 monthly as depicted in Table 1.
Looking at the table, it is clear Ahmad’s family, with a monthly family income of RM5,000 falls under the lower mid-income category. Based on my assessment of a middle income family earning RM8,000 per month, Ahmad can only afford to spend, at most, RM800 per month to pay for a RM130,000 housing loan (repayable over 30 years).
With a RM130,000 loan, representing 90% of the purchase price, Ahmad will be looking to buy a RM145,000 apartment in PJ.
Armed with that information, Ahmad went house hunting. His efforts were then complicated by the high expectations of sellers who have priced their property above his affordability margin (often on the advice of real estate agents).
They found an apartment t in Section 17, Petaling Jaya with an initial asking price of RM200,000. After much negotiation the seller was willing to sell the apartment for RM180,000. Ahmad agreed to buy the apartment at RM180,000 and paid the seller a 3% earnest payment deposit amounting to RM5,400 and signed a letter of intent.
Armed with this letter of intent, Ahmad went to his regular bank to apply for a housing loan. The Bank Officer tells him it is the Bank’s Policy to have the property he intends to purchase valued by someone on the Bank’s panel of valuers. The Bank Officer also tells Ahmad the valuer’s professional fees would have to be paid for by Ahmad in advance.
At that point, Ahmad remembers that Zulkifli, his buddy from his High School days is a registered valuer and he requests that Zulkifli’s Firm be appointed to value the apartment. He is then politely told that this is not possible because Zulkifli’s firm is not on the bank’s panel of valuers.
Ahmad reluctantly agrees to use a valuer from the bank’s panel. The bank officer also requests that he makes payment of the valuation fees to the appointed valuer.
About a week later, the Bank Officer calls Ahmad to tell him that the Valuer has submitted to the his valuation report. When Ahmad asked about the value of the apartment, he was told that the bank’s valuer has adjudged it to be RM150,000. Based on this, the bank can only grant him a 90% loan of RM135,000.
Ahmad is now in a quandary about what to do next. He has already agreed to buy the apartment for RM180,000. However, the bank is only willing to lend him RM135,000, which means he would have to fork out the difference, amounting to RM45,000.
Initially, he had only budgeted for a deposit of RM18,000 (being 10% of RM180,000). He now has to raise an additional RM27,000 – money he does not have.
Ahmad and his wife will now have to make some very hard choices. They can decide to forego the purchase and walk away from their obligations as per the letter of intent, whereupon they will lose the RM5,400 earnest payment deposit they have already paid, or they could try to raise the additional money by borrowing from friends and relatives.
Both of these are not pleasant options.
Ahmad’s dilemma is not unique. Tens of thousands of Malaysian families have, or soon will, face similar situations.
Naturally, Ahmad’s predicament brings forth some very interesting commercial and ethical questions that members of the public have been asking for years. I’ve outlined some, with accompanying answers which you can find at the end of this article (see sidebar).
However, before you proceed to that, it is best to get a better understanding of the valuation process and the purpose of a valuer.
What is Property Valuation?
Property Valuation is neither a Science nor an Art. It is, if you have to put a label on it, part science and part art.
The science involves technical surveys and investigative work that a property valuer has to conduct to get the information he/she needs to understand the physical and other related characteristics of the subject property.
The art part involves the skill and experience to interpret and analyse all the information collected, paying heed to prices recently paid for properties in the vicinity and neighbouring areas, to form a “considered professional opinion” on market value.
Property valuation is not unlike the professions of architecture, engineering, medicine or law.
In Malaysia, the property valuation profession is regulated by the Valuers, Appraisers and Estate Agents Act, 1981 (the Act).
To practice as a Valuer, a person must first possess the required academic and professional qualifications specified by the Act. The candidate must then apply to be registered with the Board of Valuers, Appraisers and Estate Agents Malaysia (BVAEA) to be a “probationary valuer” and to work with a registered valuer who shall be his “master” for two years. After having completed the practical training, the candidate must then subject himself to a “Test of Professional Competency” before a panel of the Board. The candidate will then be issued with a licence by the Board to practise as a registered valuer.
A registered valuer is licensed and authorised to carry out property valuations and plant and machinery valuations. A Valuer’s job is to assess the Market Value of the land (including the building) and all interests bestowed in and on the land at a particular point in time subject to all easements. A Valuer does not “create” or “determine” value, they read and interpret market sale evidences and accordingly assess the value of the property.
What is Market Value?
Market value is the main focus of most real property valuation assignments, where valuers are engaged to develop an estimated of market value of the subject property.
The definition of market value, as adopted by BVAEA is as follows:
“Market value is the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”
The Valuation Process
The Valuation Process in its simplest form may be defined as an analytical process to determine the fair market value of a property. Here are some of the steps valuers will have to undergo:
- Identify and define the property to be valued.
- Identify the particular right or interest to be valued namely whether to value the Freehold Interest or the Leasehold Interest or the Sub-Lessee Interest or the Tenant’s Interest.
- The Date of the Valuation. (This is especially crucial in Land Acquisition Proceedings, as the compensation to be paid for the Land that is compulsorily acquired (taken by force of Law) is the Value of the Land as at the date of the Publication in the Government Gazette that the Land is to be compulsorily acquired.
- The Purpose and objective of a valuation exercise and the type of value sought needs to be clearly defined. In most cases, it is the market value of the Property. But there are instances when the “Insurance Value” of the Building or the “Value of the Business” within the property is required.
- The appropriate method of valuation should be selected by the valuer for the specific purpose and objective of the client to properly make an assessment on a property’s value.
- The valuer should clearly state in his report the limiting conditions, if any, that the valuation of the property is subjected to.