Project – An examination of the effectiveness of depreciated replacement cost method in property valuation

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The successful operation of the various aspects of real estate demand a through and practical knowledge of the valuation. Valuation is the basis and attribute discipline of the valuer because the ability to place monetary value on an interest in land and building undermines all other professional pursuit of Agency Management and Investment, Olusegun (2000)

Value invariable forms the basis on which many estate management decisions are made, Baum (1984). The valuer special expertise is to access the capital or fair market value of any property at a certain time. His service are normally sought by anyone with an interest in or contemplating a transaction involving land and buildings. For example a valuer may be required to advice a mortgagor on the value of the security and on the mortgage loan he can advance a prospective tenant on the annual rent he should pay a vendor on the compensation he can claim under the existing and application law, Olusegun (2008).

The value can also play the role of advice to the requiring authority on the amount of compensation they should pay to claimant for the property or properties compulsorily acquired Odudu (1998) the valuer will need to know the proposal for which the valuation is required and the intention and circumstances of the claims or employer on whose he has it is been prepared.

This information is essential because it will affect the calculation of the valuer.

Richmond (1985). The valuer is guided by a lot of rules and controlled by many theories developed over the years by many valuers who have carried out similar valuation Aluko (1999).

Like an act, valuation keep taking one new forms with the advancement of years so that the valuer must be forced to break from his confinement and follow a part of more suitable for achievement of a convincing valuer opinion. An estate surveyor and valuer is called upon or given instruction by the client to give his opinion to value many different types of interest in many different types of properties for many different purpose. In such a situation the approach to the determination of value in one case which may be different from others which lead to several distinct approaches over several years which are now constitute separate methods of valuation one of thus methods is contractor test or cost method, Olusegun (2002) the cost method may be defined as a method of determining the value of properties by reference to the cost of replacing for procuring in acceptable substitute. The major appraisal principle involved in applying the cost approach is the principle of substitution; this principle operates on the logical assumption that the informed and rational buyer will pay no more than the cost to him of producing a substitute property which provides the same utility as the subject property. The principles of contribution is also of significance in applying the cost approach to the valuation of property.

This principle simply hold that a dollar spent on property should return at least a dollar value; otherwise the expenditure is not economically justified. The principles also applies in estimating accrued depreciation. The value effect of the presence of any particular features is measured by application of the principle of contribution Green (1987).

According to Green (1987) accrued depreciation is the amount of lost in value arising in all causes as measured against reproduction cost new. It applies to the lost in value of manmade improvement and not of land. From the wide range of properties that exist there are some which are designed and used for a special purpose to meet specific requirement out of the general range of the both commercial and residential properties. The contractor’s method of valuation is used to value the type of property which rarely change hands in the property markets and consequently there are not comparable on which to draw inference Olufa (2007) such properties are school, hospitals, churches, police station, town halls, local government headquarters, mosque, community function. In nearly all cases such properties are built by the authority or organization responsible for the provision of the special services or used and commonly, there is no alternative body which requires the property. In such cases, there are no sales in the market and thus, no comparable on which have to be newly built since alternative rarely exits. As a result; the price required by a body owning such properties is the cost of providing similar properties which basically the price required by a body owning such properties is the cost of erection of the building. The price for the size is based on the value of comparable sites, whilst the cost of erection is derived from prevailing building cost Olusegun (2000).

Contractor method otherwise referred to as the depreciated replacement cost (DRC) approach consists of estimating the replacement cost of building less allowance for age and shortcoming and adding there on, the value of the land and buildings. This approach assumes that cost and value are synonymous. It should however be noted that cost and value are rarely the same.

Under the contractor’s method, there are two concept which cost may be estimated namely, the adjusted replacement cost concept and the simple substitute building approach, in the former, an estimate of the cost of replicating the building in its existing form is made. Deduction are made to allow for age, obsolescence in terms of design and function, in the latter, an estimate cost of contraction, the building’s while still retain the essential function and simple nature at the original made, Ma’astrcht (2001).

1.2 STATEMENT OF PROBLEM

In the field of valuation of any property, the existing body of knowledge recommends the use of depreciated replacement cost method in property valuation in order to arrive at the value of the property. Many researchers hold the view that valuation, being an opinion of value, require the use of appropriate methodology to arrive at the basis value sought. However, the findings of the past scholars could be criticized or extended due to its failure to accommodate certain future of any property and in yielding goodwill value (investment value) rather than market value Gasparini (2011).

The primary aim of every valuer is to give advice on value (in monetary terms) of any interest in real estate having regard to the required and the factors effectives’ value. The clients decides on the purpose of valuation while the valuer determines the appropriate value concept application. Which will help to ascertain the most suitable method of valuation for the particular valuation assignment Olusegun (2000).

In an ideal situation the method properly at valuation should be comparison and investment methods where there is evidence at direct and indirect camparable data (Ogunba 2013). Hwoever where this is not available the development replacement cost method is adopted (ogunba, 2013).

According (2004) the current body of knowledge which advocates the use of investment, residual, comparative and profit valuation methods are continuously being neglected by Nigerian valuers based on the reasoning that these method produced lower values when applied in Nigeria property market.

Thus, this study attempt to fill the vita gap left by the previous scholars by examining whether depreciated replacement cost method of valuation can be efficiently used as an alternative valuation of any property, with a particular reference to some properties in different states.

1.3 AIM

The aim of the study is to examine the efficiency of the use of depreciated replacement cost method in property valuation.

1.3.1 OBJECTIVES

1. To identify some selected estates firm within the study area.
2. To find out the factor influencing the use of depreciation replacement cost method in property valuation.
3. To compare depreciated replacement cost with profit/account method and comparison method by property valuation.
4. To examine the effectiveness of depreciated replacement cost method in property valuation.

1.4 RESEARCH QUESTION

1. What are the model of data required for the depreciated replacement cost method of valuation?
2. What are the factors influencing the use of depreciate replacement cost method of valuation?
3. What is the position of depreciation replacement cost with any other two methods of property valuation?
4. How effective is depreciated replacement cost method of property valuation?

1.5 SIGNIFICANCE OF THE STUDY

The research of this nature will unravel all the factors surrounding the addition of the depreciated replacement cost method of valuation in practice. The study is important in that by comparing depreciated replacement cost method with other methods it will throw more light on why the replacement cost method has been accepted as an alternative to investment method of valuation. The usefulness of the study to future researcher cannot be overemphasized for it will open an avenue through which further research could be carried out.

1.6 SCOPE OF THE STUDY

While it is true that the topic is examination of effectiveness of depreciated replacement cost method of valuation, the study is restricted to the application of the approach and the valuation of resident and commercial properties within Kaduna metropolis.

This study may not extend beyond Kaduna state because of constraint of time and financial resources.

1.7 DEFINITION OF TERMS

1. DEPRECIATION: It is the measure of wearing out, consumption or other lost of value of a fixed asset whether arising from use, effluxion of time or obsolescence through technology or market change.
2. EXAMINATION: This is the process of studying something such as a subject, a fact or a situation that shows explain the procedures of something, being done or something to do using the chronological steps in solving it simultaneously. It is also a careful search of opinion in consideration of valuables or a sample in a population of the content in research carried out by any other of group of authors to arrive at solving a problem.
3. REPLACEMENT: Is the process of replacing an existing asset with an identical of substantial similar new asset having a similar production or service capacity. It is defined as a means where the authorities involved the service of a professional for the determination of replacement cost of a particular property or building arise as a result of compensation either by government or by organization.
4. COST: This is the actual or prime estimated value worth of a property either land or building in a transaction of business between two parties concerned through the service of profession to estimate and arrive at the broad cost of value.
5. METHOD: Is the procedure used in carrying out research of the relevant variable used to arrive at an answer required by the researcher in other to solve the problem at hand.

Project – An examination of the effectiveness of depreciated replacement cost method in property valuation