What valuation means
A valuation is an opinion, prepared to a professional standard, of what an asset would fetch.
It is not a price. A price is what somebody actually paid. A valuation is a considered estimate of what a willing buyer and a willing seller, neither under compulsion, would agree.
That is why the purpose matters so much. A valuation for a mortgage is prepared conservatively, because the lender wants to know what it could recover in a forced sale. A valuation for probate is a snapshot at the date of death. A valuation for an investment looks forward at what the asset can earn. The same building can carry three different figures for three purposes, and each can be correct.
In Nigeria, property valuations for formal purposes are prepared by estate surveyors and valuers registered with the professional regulatory board, and a valuation from somebody outside that regime will not be accepted by lenders, courts or the tax authorities.
How it is used
Property valuation uses a small number of established methods.
The comparison method looks at recent sales of similar properties in the area. It is the most reliable where genuine comparable transactions exist, which in many Nigerian locations they do not.
The investment method capitalises the rental income the property produces, which suits commercial and let residential property.
The cost or replacement method values the land and adds the depreciated cost of rebuilding, used for specialised buildings with no market.
The profits method values a property by reference to the business run from it, used for hotels, filling stations and similar.
Business valuation works differently. A multiple of earnings applies a sector multiple to profit. A discounted cash flow projects future cash and discounts it to present value. An asset based approach values what the business owns less what it owes, and suits asset heavy or loss making businesses.
For a Nigerian small business sale, an earnings multiple is the usual starting point, adjusted for how transferable the trade really is.
Key features
- A professional opinion of worth, not a price
- The purpose shapes the basis and therefore the figure
- Property valuations are prepared by registered estate surveyors and valuers
- Comparison, investment, cost and profits are the main property methods
- Business valuation uses earnings multiples, discounted cash flow or asset value
- Required for probate, lending, tax, disputes and investment
How this works in Nigeria
The shortage of reliable comparable data is the defining Nigerian difficulty.
Property transactions are not centrally recorded in a way that makes real sale prices accessible, prices are often quoted in dollars in some markets and naira in others, and asking prices are frequently far above achieved prices. Valuers therefore rely more heavily on judgment than they would in a market with published transaction data, which is why two competent valuations of the same Lagos property can differ noticeably.
Probate is where families meet valuation directly, because probate fees are assessed on the value of the estate. A valuation prepared for that purpose has a direct financial consequence, and it must be defensible.
For lending, banks generally instruct their own valuer rather than accepting one supplied by the borrower, and they apply a forced sale value that is lower than open market value.
For business sales and investment, the absence of comparable transaction data has the same effect. Nigerian small business valuations are negotiated far more than they are calculated, and a seller with clean audited accounts, documented recurring revenue and a business that runs without them will achieve a higher multiple than one without.
Open market value vs forced sale value vs book value
Three figures for the same asset, and confusing them costs money.
Open market value assumes a willing buyer, a willing seller, proper marketing and adequate time. It is the highest of the three and it is what a seller wants to hear.
Forced sale value assumes a compressed timescale and a seller under pressure. Lenders use it, because it estimates what they could recover if they had to sell quickly, and it is materially lower.
Book value is an accounting figure: cost less depreciation, sitting in the accounts. It reflects history rather than the market, and for property in an inflationary market it is usually far below what the asset is worth.
A business owner who believes their premises are worth the open market figure, and a bank lending against the forced sale figure, are both being reasonable. Knowing which basis a number was prepared on is the first question to ask about any valuation.
Limits and risks
A valuation is an opinion, and it can be wrong. Two qualified professionals can differ significantly, particularly where comparable evidence is thin.
It is also purpose specific and dated. A valuation prepared for a mortgage is not appropriate for a probate application, and a figure from eighteen months ago in a moving market is of limited use.
Valuations can be influenced by who instructs them, which is why banks instruct their own and why courts prefer independent experts.
And for businesses, valuation is often theoretical. The number that matters is what a buyer will actually pay, and in a market with few buyers a well argued valuation may bear little relation to the achievable price.
Worth knowing
Tell the valuer what the valuation is for before they start, and check the basis stated in the report. A Nigerian seller comparing a bank's forced sale figure with an agent's asking price is comparing two different questions, and the disappointment is a reporting problem rather than a market one.
Questions people ask
What is a valuation?
A professional opinion of what an asset would fetch, prepared to a recognised standard. It is not a price, and the basis used depends on the purpose of the valuation.
Who can value property in Nigeria?
Estate surveyors and valuers registered with the professional regulatory board. A valuation from outside that regime will generally not be accepted by lenders, courts or the tax authorities.
Why do two valuations of the same property differ?
Because the basis and the purpose differ, and because Nigerian comparable transaction data is thin. A mortgage valuation, a probate valuation and an investment valuation answer different questions about the same building.
How is a small business valued?
Usually as a multiple of maintainable earnings, adjusted for how transferable the trade is, with discounted cash flow and asset based approaches used where they fit better. In practice the figure is negotiated more than calculated.
What is forced sale value?
What an asset would fetch on a compressed timescale with a seller under pressure. Lenders use it because it estimates recovery on enforcement, and it is materially lower than open market value.
Do I need a valuation for probate?
Yes. An inventory and valuation of the estate is required, and probate fees are assessed on the value, so the figure has a direct financial consequence and must be defensible.