There have been a lot of misconceptions about the forced sale value, what it means and how it should be arrived at. Many valuers do not necessarily understand that forced sale value is not a basis of valuation and should never be an opinion of value. Similarly, the term forced sale value should not appear in all valuation reports, except if the purpose of valuation requires it’s inclusion.
There are times valuation clients approach valuers, requesting for a valuation, with the view of knowing only the forced sale value. This is not necessarily correct and the onus is on the valuer, who is a professional, to educate the client on valuation basis, before going ahead to advice on the forced sale value. This position is affirmed in Paragraph 10.8 of VPS 4 of the RICS Valuation –Global Standards that clears states that the forced sale value is not a valuation that can be determined in advance, but a figure that might be seen as a reflection of worth to that particular vendor at the particular point in time having regard to the specific context.
This article has been put together to make some clarifications on what the forced sale value is, what it is not, and guide on how it is to be determined in line with valuation standards.
WHAT IS FORCED SALE VALUE
Two of the most popular (there are many valuation standards) world recognized valuation standards would be used in defining the forced sale value.
In the International valuation standard 2022, the forced sale value is categorized under IVS 104 Bases of Value and premise of value. Paragraph 170.1: The term “forced sale” is often used in circumstances where a seller is under compulsion to sell and that, as a consequence, a proper marketing period is not possible and buyers may not be able to undertake adequate due diligence.
In the RICS Valuation –Global Standards effective from 31 January 2022, the forced sale value appear under VPS 4 Bases of value, assumptions and special assumptions. Paragraph 10 of VPS 4 is centered on valuations reflecting an actual or anticipated market constraint, and forced sales.
Paragraph 10.7 of VPS 4 Bases of value in the RICS Valuation –Global Standards says: The term ‘forced sale value’ must not be used. A ‘forced sale’ is a description of the situation under which the exchange takes place, not a distinct basis of value. Forced sales arise where there is pressure on a particular vendor to sell at a specific time. In this paragraph, RICS standard is in consonance with the International valuation standard, that forced sale value is not a valuation basis, but only a situation upon which a value can be advised by the valuer.
WHAT ARE THE PURPOSES OF VALUATION?
Valuations of all types of assets can be done for various purposes. The word “purpose” refers to the reason(s) a valuation is performed. Common purposes include (but are not limited to) financial reporting, tax reporting, litigation support, transaction support, and to support secured lending decisions.
WHAT ARE VALUATION BASES
Bases of value (sometimes called standards of value) are the fundamental principles/ premises upon which the valuation has been based. The client tells the valuer the purpose of valuation, as the purpose determines the valuation basis, while the valuation basis determines the valuation method.
The IVS recognizes Market Value, Market Rent, Equitable Value, Investment Value/Worth, Synergistic Value and Liquidation Value as bases of valuation.
IS FORCED SALE VALUE A BASIS OF VALUATION?
No, it is not.
The International Valuation Standard categorized it under Premise of Value and paragraph 170 of IVS 104 Bases of Value states that “forced sale” is a description of the situation under which the exchange takes place, not a distinct basis of value.
Paragraphs 10.7 and 10.8 of VPS 4 of the RICS Valuation –Global Standards settles this: the term is a description of the situation under which the sale takes place, and so it must not be described or used as a basis of value.
HOW IS FORCED SALE VALUE DETERMINED?
In both the International valuation standard 2022 and RICS Global Standard, no specific percentage was mentioned for forced sale value, rather it was described as a situation upon which advice can be given with the valuer using his/her experience and judgment based on prevailing market condition and more importantly what the seller wants. See paragraph 10.8 of VPS 4 of the RICS Valuation –Global Standards which says advice may be given on the likely realization in forced sale circumstances.
If a valuer affirm that the forced sale value is usually or must be 2/3 or 70% of the Market value, the valuer is not correct. Paragraph 10.8 of VPS 4 of the RICS Valuation –Global Standards says: Any relationship between the price achievable by a forced sale and the market value is coincidental. This part automatically negates the position that the forced sale value is or must be 2/3 or 70% of the Market value.
Valuers are permitted to assist in determining forced sale value, based on market condition, but such situation is described as commercial judgment of the valuer.
It is important that the misconception about the forced sale value is cleared, as this is the intention of the drafters of the International valuation standard and the RICS Global Valuation Standard, aiming for a universally acceptable way of doing valuation.
There is no rule or law that says the forced sale value must be a certain percentage of the market value, but the valuer as the professional is to advice the client or beneficiary of the report on the probable value that can be realized in a forced sale situation where the seller is under compulsion to sell the property.
CASE STUDY OF THE SIMILAR PROPERTY IN DIFFERENT LOCATIONS IN LAGOS
To replicate the popular Oriental Hotel (presently along Ozumba Mbadiwe Avenue/ Lekki Epe Expressway) in a location like Ajangbadi in Lagos would most likely cost same price. If the present one cost ₦5 billion, the one in Ajangbadi would cost same or slightly different amount to build. Assuming the promoter approach a bank for facility, with the intent to use the property as collateral, assuming you are the valuer engaged to provide valuation service on the Market value, as well as the forced sale value, would you adopt 70% of the market value knowing that the hotel may not be doing well? or you would be cautious, knowing that it may be difficult to sell such property should there be a foreclosure because of the location and some other factors?
Presently, we valuers have zeroed our minds at using a rate range between 66% to 70% of the market value for all types of assets we value irrespective of the location as forced sale value. Valuation of a property in Ikeja, forced sale value 70% of market value. Valuation of a property in Asaba, forced sale value 70% of market value. However, this article has presented to us a better approach of advising on the forced sale value.
WHAT VALUERS MUST CONSIDER
What the valuer must consider before arriving at the probable forced sale value are stated in the International valuation standard, under IVS 104 Bases of Value and premise of value. Paragraph 170.3:
(a) consummation of a sale within a short time period,
(b) the asset is subjected to market conditions prevailing as of the date of valuation or assumed timescale within which the transaction is to be completed,
(c) both the buyer and the seller are acting prudently and knowledgeably,
(d) the seller is under compulsion to sell,
(e) the buyer is typically motivated,
(f) both parties are acting in what they consider their best interests,
(g) a normal marketing effort is not possible due to the brief exposure time, and
(h) payment will be made in cash.
Finally, the forced sale value could be 10%, 20%, 50%, or 95% of the market value, provided that the valuer has complied with Paragraph 170.3 as quoted above, used his best judgment with reasonable assumptions and also discussed extensively with the seller.
This article expresses a personal opinion as well as excerpts from International Valuation Standards 2022 and RICS Global Valuation Standard 2022 and does not in any way substitute for such professional advice or services and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business, without consulting a qualified real estate or financial Advisor.
Ademola Ladega (ANIVS, RSV MNIM, FIMC) is the founder and managing partner of AOL Consult (www.aolmanagementconsult.com.ng) He is a highly experienced real estate consultant with field/practical experience spanning over 14 years, having previously worked at Ismail and Partners, where he contributed a great deal to the success of the firm and rose to the position of the Head of Valuation and Senior Associate. He is presently serving as the Secretary of the Plant and Equipment Faculty/Professional Group of the Nigeria institution of Estate Surveyors and Valuers, having been appointed in July, 2020
Mr. Ladega has extensive experience of providing valuation services in Nigeria to large public and private companies in many sectors including utilities, banking, insurance, financial services, agro-industrial, shipping, commercial and trading sectors. As well as experience in reporting in accordance with the regulatory requirements of Nigeria, in full compliance with ESVARBON Nigeria Valuation Standards (Green Book) 2018 IPSAS, IFRS, RICS, and IVS 2022