Market Value vs. Replacement Value

In my 15 years of experience in the field of property valuation I have noticed that a lot of people do not fully understand the difference between market value and replacement value.  I will try to illustrate this by giving some practical examples.

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.

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.

People often insure their properties at market value, or even worst at 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 would have been under insured at about 42.5 %. This will also mean that should your claim be R 100 000 on your home and you’re 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.

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.

People should also be careful when improving their properties in certain areas of a town.  Let’s say you have a property that is currently worth R 500 000 and you spend R 300 000 on improvements, but the highest property in your area sold for R 600 000.00.  This would result in a potential over capitalisation of approximately R 200 000.

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

 

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