Replacement Value vs. Market Value vs. Municipal Value

In my experience in the field of property valuations, I have noticed that some people do not fully understand the difference between replacement value, market value and municipal value. I will try to illustrate this by giving some practical examples below:

Replacement value refers to the estimated amount that a person would pay to replace an asset at a certain time and according to its current worth, by using the same standard of finishing’s. This value will be relevant in insuring your property or assets in the event of damages incurred.

Practical Example: People often insure their properties at market value, or even worst at a low municipal valuation. This could be disastrous when claiming for insurance purposes. Should you insure your house at market value of let’s say R 800 000, and replacement value was actually R 1 400 000, you will be under insured at about 42.5 %. This will also mean that should your claim be R 100 000 on your home and your insurance company found that you were underinsured, they will only pay out R 57 500, instead of the actual loss of R 100 000. It is therefore imperative that you insure at the correct replacement value!

Market Value is the estimated amount for which an asset should exchange hands on the date of valuation between a willing buyer and a willing seller after being properly marketed.

Practical Examples: When buying or selling a property a person should look at the market value of a property. This would be the value of your property in the current market. If you put your property in the market at too a high value, it will be in the market for a long time and on the other side, should you sell your property at a lower value you would run the risk of a financial loss. Rather get a professional valuation and make sure of the correct property value.

This is also a good idea even when using an Estate Agent, as the professional report will give you more bargaining power with the agent and the potential buyer. I currently work with Estate Agents, and they are there to find you the right house, but with an independent 3rd party’s valuation, you will know it is at the right price.

I have recently done a valuation for a client who emigrated to Australia. The client was prepared to sell the property at municipal value of R 1 720 000. After the client decided to do the valuation, I valued the property at R 2 450 000. Then after negotiations, the potential buyer agreed to a sales price of R 1 900 000. This means that the client received R 180 000 more, by just spending a couple of thousand on a professional valuation. Make sure that you are selling at market value!

People should also be careful when improving their properties in certain areas of a town. Let’s say you have a property with a market value of R 500 000 and without determining the market value first, you spend R 300 000 on improvements. This person might be now under the impression that they now have a property of approximately R 800 000 - 900 000, but then after market research are done, it showed the highest property in your area sold for only R 600 000.00 and immediately it resulted in an over capitalisation of R 200 000. Make sure you know the market value of your property!

Municipal Value is the value determined by local authorities by means of making a periodical survey of the land and all improvements in their jurisdiction. This survey is carried out by a Municipal Valuer, appointed by the local authority and determining the value by using a mass appraising system. Such valuation then helps the local authority in charging municipal tax on the properties.

Practical Example: People should also check their latest municipal valuations. If your property has been valued to high, you will pay higher property tax! Although the tariffs vary from municipal to municipal, as well as property type to property type, a property in our area will mean an extra R 24 per year for each R 1 000.00 valued to high. In the latest Johannesburg Valuation Roll, the value of some properties quadrupled! If we then apply the same tariff, as indicated above, property tax on a property which increased from R 5 000 000.00 to R 20 000 000.00 will mean an increase on property tax from R 118 960 per year to R 475 840.00!

In this fragile market of today it is well worth spending a few thousand rand on a professional valuation, in order to make sure you don’t lose hundreds of thousands!

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