THE COMPARATIVE METHOD OF VALUATION AND THE COST METHOD IN THE VALUATION OF PROPERTIES FOR MORTGAGE TRANSACTIONS.

ESV Ekine, Augustine Nordi Prince
Valuation of properties for mortgage transactions is a crucial process that determines the value of a property for lending purposes. Two commonly used methods of valuation for mortgage transactions are the Comparative Method and the Cost Method. In this article, we will explore these two methods, their advantages, and disadvantages, and which method is more suitable for mortgage transactions.

Comparative Method of Valuation

The Comparative Method, also known as the Sales Comparison Approach, estimates the value of a property by comparing it to similar properties that have recently sold in the same market. This method assumes that a buyer will pay the same price for a property as they would for a similar property in the same area. The steps involved in the Comparative Method are:

1. Identify similar properties (comparables) that have recently sold in the same market.
2. Adjust the sales prices of the comparables to account for any differences between the properties.
3. Average the adjusted sales prices to determine the value of the subject property.
   Advantages:

• Easy to understand and apply
• Provides a market-driven value
• Accounts for market trends and conditions
  Disadvantages:
• Requires recent sales data, which may not always be available
• May not account for unique property features or circumstances
• Can be influenced by external factors, such as market fluctuations

Cost Method of Valuation

The Cost Method, also known as the Cost Approach, estimates the value of a property by calculating the cost of replacing or reproducing the property, minus depreciation. This method assumes that a buyer will pay no more for a property than it would cost to build or replace it. The steps involved in the Cost Method are:

1. Estimate the cost of replacing or reproducing the property.
2. Calculate the depreciation of the property.
3. Subtract the depreciation from the replacement cost to determine the value of the property.
   Advantages:

• Accounts for the cost of construction and materials
• Can be used for unique or special-purpose properties
• Provides a floor value for the property
  Disadvantages:
• May not account for market conditions or trends
• Requires accurate cost data, which may not always be available
• Can be influenced by external factors, such as inflation
  Comparison and Conclusion
  Both the Comparative Method and the Cost Method have their advantages and disadvantages. The Comparative Method provides a market-driven value and accounts for market trends and conditions, but may not account for unique property features or circumstances. The Cost Method accounts for the cost of construction and materials, but may not account for market conditions or trends.
  For mortgage transactions, the Comparative Method is generally more suitable, as it provides a market-driven value and accounts for market trends and conditions. However, the Cost Method may be used in conjunction with the Comparative Method to provide a floor value for the property.
  ESV Ekine, Augustine Nordi Prince,a registered Estate Surveyor and Valuer writes from Port-Harcourt, Rivers State.