Municipal Valuations are not accepted as accurate by SARS (potential tax purposes), and it is not accepted as accurate 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:

• It is done by using mathematical (regression) models.
• The valuer does not physically inspect the properties.
• Because of the above, it is often not accurate.
• The municipal value may only be used for rates & taxes purposes.

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

• For example, a large city has more than a million properties, which must be valued by a valuation firm within a few months.
  No valuation firm has the capacity to inspect each property and spend a few hours on each valuation.
• 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 all over the world, not only in South Africa.

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

• Some flats are 3-bedroom, some 2-bedroom, and some 1-bedroom.
• Say there were many recent transactions where 3-bedroom flats sold for R600 000, 2-bedroom flats sold for R500 000, and 1-bedroom flats sold for R400 000.
• The above information is logged into the mathematical model.
• If a 2-bedroom flat must be valued, the model will indicate the value as     R500 000.

Inherent weaknesses of a mathematical model:

• The mathematical model does not know that the flat was vandalised by tenants and will require R150 000 to repair. Thus, the correct value is actually         R500 000 – R150 000 = R350 000.
• 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 take into consideration all these factors.

Different levels of accuracy are required for different purposes

Maximum accuracy required:

• Preparation for court cases, arbitration, and disputes
• Purchase, sale, expropriation, and the division of assets
• Potential tax (SARS)

Limited accuracy required:

• Municipal rates & taxes
• Preliminary investigations
• Preliminary budgets

Even accurate valuations differ

• It is a known fact that valuations done by two different valuers of the same property, differ.
  • The reason is that although valuation methodology is a scientific discipline and process, during the valuation process the valuer has to make subjective decisions which lead to differences in valuation estimates. Thus, it should differ otherwise one valuer copied the other valuer.
• Much research was done internationally to determine how much an acceptable difference is.
  • For a relatively easy valuation (house) a bandwidth of up to 10% is acceptable.
  • 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)