UNDERSTANDING VALUATION DISCREPANCIES IN SIERRA LEONE

INTRODUCTION

Valuation determines the current worth of an asset, investment, or company. It involves analyzing various factors, such as financial data, market conditions, and prospects, to estimate the entity's fair value. Fair value is the price agreed upon in a transaction between a willing buyer and a willing seller who reasonably knows the relevant facts.

Valuation refers to the art, or science, of estimating the value for a specific purpose of a particular interest in property at a particular moment in time, taking into account all the features of the property and also considering all the underlying economic factors of the market, including the range of investment alternatives.                           (Millington, 2014, quoted by Mooya, 2016:7-8)

A valuation report is a crucial document that assesses the estimated value of a particular asset, such as real estate, businesses, or financial instruments. Valuation when prepared by a qualified professional it serves several purposes:

·         Determine market or Saleable value of the asset,

·         Guide management decision-making, compliance, negotiations, risk management, and court judgement

·         Valuation report for investment decision and asset management.

However, discrepancies in valuation reports due to the lack of standardization can lead to inaccurate market value determinations, flawed decision-making, and ineffective risk management. These discrepancies can result in financial losses, legal disputes, and a lack of trust in the valuation professionals and processes.

Valuation, like accounting, is regulated by international valuation standards, which have over 137-200 member organizations in more than 137 countries worldwide. These standards, like the IFRS and IAS previously, guide the valuation process and create confidence in valuation reports. They provide a framework for assessing the value of assets, ensuring consistency and accuracy in valuations across different countries and markets. By adhering to these standards, valuers can produce reliable and credible valuation reports, reducing the likelihood of significant discrepancies.

Besides IVS, there are other national and international professional organizations which regulate the industry and members.  The Valuation standards also serve as a guide for valuers deciding the intent of the property, the purpose of valuations, and the values. When you follow this valuation process, there is a chance that the valuation conducted by different valuers will arrive at a very close value.

Royal Institution of Chartered Surveyors (RICS), is the leading professional body working to advance knowledge, uphold standards, and inspire current and future valuation professionals. It independently regulates chartered professionals and firms, building trust and confidence with clients and consumers. RICS has over 130,000 members and candidates operating in the development and management of land, real estate, construction and infrastructure across more than 140 countries globally.

Other valuation organizations include Appraisal Institute of Chicago, USA; Nigerian Institution of Estate Surveyors and Valuers; Ghana Institution of Surveyors -Valuation and Estate Surveying division; The Institution of Surveyors of Kenya among others.

Regrettably, the absence of valuation institution in Sierra Leone is the primary reasons for the significant variations in valuations figures. For instance, two valuers might assess the same property and come up with vastly different values due to the lack of a standardized approach. Discrepancies are inevitable without a country-wide standard or district procedures for adhering to international valuation.

The Valuation standards range from IVS 102-IIV5-500. At every stage, the standards provide specific guidelines for valuers to follow to ensure accuracy and consistency in the report. From the basis of valuation, methodology and assumptions. For example, if you have IVS -100, the valuation framework, you will use IVS to determine what kind of framework this valuation requires. What is the purpose of valuation, what is the data available, and what approach will you use to determine whether IVS 102 will be used with a basis of value at the end of the day?

RICS Redbook for instance guide you throughout the valuation process, from engagement, to developing a scope of work to submitting a report to the client. Thus, lack of strict adherence to any of this standard has resulted to a frequent variation of application of basis of values and approaches in Sierra Leone.

Major Challenges

Lack of Standardization

One of the primary reasons for varying valuations is the absence of standardized valuation methods and practices across the industry. Valuers may employ different approaches, leading to inconsistent results.

Limited Data Availability

In Sierra Leone, inadequate access to reliable data, such as recent sales prices and rental rates, hampers the accuracy of property valuations. Valuers may rely on incomplete or outdated information, resulting in variations valuations figures. The lack of data also leads to valuers falling back on their inherent approaches that is the replacement value approach. Because most valuers in Sierra Leone have Engineering bias, they often fall back on replacement values approach by estimating cost of construction and less depreciation to arrive at open market. But this can not be suitable for all types of properties of purposes of valuation.  

Subjectivity in the Valuation Process

Valuation, unlike other practices, even if you have data for any kind of approach valuer will have to make some form of judgment during the interpretation of the data. The subjective nature of property valuation allows for interpretation and judgment, which can introduce bias and inconsistency among valuers. Differences in opinion on factors like market trends and property conditions contribute to valuation disparities.

External Influences

This plays a massive role in valuations. Valuation has to do with the market data. Most times, the economy of the country is influenced by the political instability and also influenced by the values, and market speculations where the market is moving towards. Economic fluctuations, political instability, and market speculation can significantly impact property values. Valuers may interpret these external factors differently, leading to varying assessments of property worth.

Proposed Solutions

Establishment of Valuation Standards

Professional associations and government bodies should collaborate to develop and implement standardized valuation practices. This includes defining clear methodologies and guidelines for valuers to follow, promoting consistency and transparency in the valuation process.   

Enhancing Data Infrastructure

It is vital to have an advanced way of storing data or information that can be easily accessed. Most information or data associated with the properties are seen as classified information. Most people do not disclose the sale price of a property or what they earn from rent from a property. To make the market a bit perfect, we need to develop a central database where we can access recent sales and rentals.

 Efforts should be made to improve data collection and dissemination mechanisms within the real estate sector. This may involve creating centralized databases for property transactions, conducting regular market surveys, and leveraging technology for data analysis.

Training and Certification

No university or tertiary institutions in Sierra Leone currently offer training on property valuation. Because this is not in existence, it is challenging for us to have a conclusive approach in terms of who is qualified to do a valuation of a specific nature or who is not. Unlike real estate agents, valuation is not something you wake up one morning and become a valuer. It entails training and certification.

Providing comprehensive training programs and certification courses for property valuers can help enhance their skills and expertise. Emphasizing the importance of adherence to professional standards and ethical conduct is crucial in reducing valuation discrepancies.

Stakeholder Collaboration

The real estate industry needs the involvement of stakeholders like the government, professional associations of valuers, National Revenue Authority (NRA), councils and municipalities and other agencies dealing with valuations, and financial Valuers, professional associations, and government agencies should collaborate closely to address valuation challenges. Regular dialogues and forums can facilitate knowledge sharing, exchange of best practices, and collective problem-solving initiatives.

Conclusion

The issue of valuation discrepancies in Sierra Leone requires concerted efforts from all stakeholders to achieve meaningful improvements. By implementing standardized practices, enhancing data infrastructure, investing in professional development, and fostering collaboration, we can mitigate the factors contributing to valuation variations and build a more reliable and transparent real estate market in Sierra Leone.