MORTGAGE INVESTMENT IN OSUN STATE: AN EVALUATION OF THE ROLE OF ESTATE SURVEYORS AND VALUERS

MORTGAGE INVESTMENT IN OSUN STATE: AN EVALUATION OF THE ROLE OF ESTATE SURVEYORS AND VALUERS Augustina Okorie 1, Daniel Dabara I 2 and I Abdullahi 3 1, 2 Estate Management Department, Federal Polytechnic Ede, PMB 231 Ede, Osun State, Nigeria 3 Estate Management Department, Nuhu Bamalli Polytechnic Zaria, PMB 1061, Zaria, Kaduna State The determination of value of land and landed properties for all purposes is by virtue of decree No 24 of 1975 the responsibility of an Estate Surveyor and Valuer. Concern has risen over the incursion of non Estate Valuers in Mortgage Valuations and it is perceived that banks are beginning to doubt the Estate Valuer s opinion. This paper investigates Mortgage investment with respect to the Estate Valuers work. A survey research method was adopted for the study. Two different sets of well structured questionnaires were served on 25 practicing Estate Valuers and loan officers in the 22commercial Banks (respectively) in Osogbo and Ile-Ife of Osun state. The data collected were analyzed using frequencies, charts, mean score, likert rating scale and regression analysis. Findings revealed among other things that majority of the Estate Valuers (47.07%) often adopt cost method in valuation for mortgage purposes. The general consensus was that the Estate Valuers figure provides adequate cover for the amount of loan advanced. The regression analysis results indicated a high positive correlation of 0.935 between the variables. Of the four predictors used, only the second predictor (Valuer's do not carry out enough investigation/inspection) significantly predicts Valuer s work. The study recommends that Estate Valuers should ensure adequate inspection and proper reporting of properties. The Nigerian Institution of Estate Surveyors and Valuers is urged to organize a mandatory educational enlightenment programmes aimed at keeping Estate Valuers abreast with the global trends in valuation practices to enable them satisfy their clients expectations. Keywords: estate surveyor, investment, landed property, mortgage, valuation INTRODUCTION In mortgage investment, the desire for assurance that the credit facilities offered would be repaid gave rise to the need for collateral securities to guarantee loan advancement. Over time, both landed and non landed assets are being used to guarantee loan advancement; where landed properties are used to as security for lending, resort is made to the Estate Valuer who uses his professional capacity to estimate the value of the properties for mortgage purposes and also goes further to advice on the maximum amount that can be granted as loan. An earlier research conducted by Ogunba and Ajayi (1998) found that recipients of valuation reports in Nigeria, especially bankers feel that the Valuers conventional 1 okaugusta@yahoo.com 2 dabara2000@yahoo.com 3 isazazzauu@yahoo.com Okorie, A; Daniel D I and Abdullahi I (2012) Mortgage investment in Osun State: An evaluation of the role of estate surveyors and valuers In: Laryea, S., Agyepong, S.A., Leiringer, R. and Hughes, W. (Eds) Procs 4th West Africa Built Environment Research (WABER) Conference, 24-26 July 2012, Abuja, Nigeria, 1085-1094. 1085

Okorie et al. methods are shrouded in mystery and are indefensible; hence the emergence of contemporary models. Furthermore, it has been claimed that some borrowers often collude with unscrupulous valuers to inflate the value of their assets in order to have access to higher amount of loan. Crossby 1993 also observed cases of loan which could not be realized as a result of collaterals which were sold below valuations. Babawale (2006) revealed that the valuers methods and works have come under increasing criticisms and condemnation while other professionals, notably engineers and accountants, not only encroaching into areas which traditionally have been the preserve of professional valuers, but are also claiming to be more competent. This is without prejudice to the fact that only an Estate Surveyor and Valuer is by virtue of decree No 24 of 1975 statutorily empowered to determine the value of land and landed resources for all purposes. The reasons for the incursion of non professionals in the art of valuation may not be unconnected to the issue of accuracy, variations and reliability of valuation methods. Property valuation in Nigeria has been witnessing a lot of problems which seem to have brewed doubt in the heart of users of reports submitted by valuers. Inaccuracy and variations were observed by researchers as responsible factors (Ogunba and Ajayi, 1999; Ajayi 2009). This arose from the use of inappropriate and/or dissimilar methods of valuation for the same valuation assignment by Estate Surveyors and Valuers. This paper aims evaluating the role of the Estate Surveyor and Valuer in mortgage investment with a view to improving on the quality of valuation practice. Some of the questions to be addressed by the paper include: What method(s) of valuation does the Estate Valuer often adopt for mortgage purposes? What is the estate valuers level of awareness and understanding of the contemporary models? What is the clients perception of the estate valuers work with respect to collateral valuation? NATURE OF MORTGAGE ACTIVITY IN NIGERIA The success of any investment activity rests on the availability of adequate finance. Most often financial requirement investment activities go beyond the investor s current financial resources and this situation naturally turns investors to financial institutions for loan. Mortgage loan are normally obtained from commercial banks, mortgage banks, building societies or cooperatives. In Nigeria, bulk of lending on residential property is the hand of the Federal Mortgage Bank of Nigeria and various state housing corporations, while short term fund for commercial purposes are normally obtained primarily from commercial banks. The provision of this loan however carries risk of default in payment hence there is need to insulate inherent risk in banks providing loan by taking adequate and appropriate security. A pledge of an interest in property as security for repayment of a loan with provision for redemption on repayment is called mortgage (IVSC, 2007). In mortgage transactions, the borrower (mortgagor) agrees to pay to the lender (mortgagee) the principal and the interest on it, usually by means of periodic payments (Ajayi, 2009). This security is not taken with the intension of serving to repay the loan but rather as a last resort where normal source of credit repayment fails. The bank is therefore interested only in assets whose ownership is evidenced by document of title and the ownership of which can be transferred by means of this document. Before security is accepted for loan, the 1086

Mortgage investment value of such security must be ascertained. Mortgage valuation is carried out and the estimate forms the basis for lending. Banks need to be assured that both the initial property value and the pattern of property value overtime exceed the outstanding loan balance for any given property over the terms of the loan. It is normal for bank to advance as loan two third of the estimated market value of the security as loan to the borrower. However, if it is determined that the property is not likely to be sold easily, the loan to be advanced would be appropriately lower. Two types of mortgage exist; legal and equitable mortgages. Legal mortgage is at force where the mortgagor surrenders title document to the mortgagee in addition to a drawn up formal deed of legal mortgage which must be executed by both parties. Equitable mortgage on the other hand is at force when the agreement is evidenced by an informal document, memorandum of deposit under land coupled with a deposit of title document to the lender. The prevalent practice in the country (and indeed Osun state) for securing loan is the creation of legal mortgage. The process involved in legal mortgage include investigation of the title to land, inspection of property, Governors consent, deed of legal mortgage, stamping, registration and insurance. In the event that mortgagor defaults in repayment of loan, a number of remedies are possible to the lending bank. These include: the right to appoint a receiver to collect income from the property; the right to take possession and become recipient of income from the property; the right to sell; and the right to sue the mortgagor for any outstanding balance (Odudu, 1998). The legal mortgage agreement empowers the lending bank to sell the mortgaged property without first resorting to law court. Although the bank has the above rights, such rights only be exercised with certain conditions such as: mortgage debt is due for payment, a written notice demanding for sale, mortgagor has defaulted in making payment for at least three month, when interest has not been paid for at least three months after it has become due and where there is breach of some covenant in the mortgage agreement. PROPERTY VALUATION PRACTICE IN NIGERIAN REAL ESTATE BUSINESS Valuation practice started in Nigeria in the late 1960s. By 29 th August, 1975, Decree No 24 of 1975 was promulgated to establish the Estate Surveyors and Valuers Registration Board of Nigeria as the official machinery for the regulation of the profession of Estate Surveying and Valuation in the country. In addition, this decree gave official recognition to the Nigerian Institution of Estate Surveyors and Valuers as the national professional organization to cater for the interest of those in real estate practice including valuation for purposes. Dale (2000) observes that for the element of valuation to contribute effectively to a property market, it must provide a clear mechanism for offering real property for sale, support and make available mortgage advice. In any case, the purpose of valuation, type of value required and the relevant circumstance determines the facts and assumptions that are appropriate and the method to be used. There are five traditional methods of valuation. These are investment, comparative, cost, residual, and profit methods. In Nigerian practice, the three most used methods are investment, comparative and cost methods (Akomolede, 2004). These three traditional methods rely on net income, recent sale prices and replacement cost data respectively to provide indications of value. Income, sales and costs vary widely from one situation to the next, and particular importance is given to the specific characteristics of the subject property (Barbu and Gramescu, 2009). Ajayi (1990) posited that the investment and comparison method are most relevant for mortgage valuation purpose. The former reflects the income generating capability of 1087

Okorie et al. the property in the event of default while the latter gives a clue on realizable market price at foreclosure. The conventional methods of valuation have been subject to various criticisms worldwide. These include errors of logic and arithmetic, and the implicit nature of yield used in investment method (Baum and Macgregor, 1992; Ajayi, 1994); the uniqueness of individual property and the tendency for sale prices to be in some degree influenced by the special needs of purchasers or vendors (Kondratenko, 2005; Davis, 2010); and the difficulty in accurate quantification of depreciation in existing improvements in Cost Method (Marchitelli, 1992; DeRoos and Rushmore, 2004). Consequent upon these, a host of contemporary models have emerged which comprises: Discounted Cash Flow (DCF) models, Statistical Approaches, Neural Network and GIS Approach (Bello and Bello, 2007). Aiyedun (2009) noted that two distinct approaches evolved for determining open market value i.e. the direct capitalisation method and the DCF (Discounted Cash Flow) method. Studies conducted by Mokrain (2002) reveal that valuation methods employed in the UK, Netherlands, Germany, France and Sweden vary between DCF approaches and income capitalization approaches. Property valuation performs an essential role in mortgage transactions. It provides information to underpin lending decisions. The basis of valuation for mortgage is normally the open market value. In Nigeria however, the problems of inaccuracy and inconsistency (variance) in the valuation practice exist. It has been generally observed by scholars that the market value has not been similar with price. Studies have also confirmed that values arrived by different Estate Surveyors and Valuers have often been different from one another. Ajayi (2003) noted that increased valuation accuracy and consistency are the demand of the more sophisticated and enlightened clients in the emerging property market of today. While other financial consultants like Accountants, Stockbrokers have progressively refined their financial techniques to meet their changing clients expectations, this cannot be said of Nigerian property professionals. Ojo (2004) pointed out that the Nigerian Estate Surveyors and Valuers have been rather slow and lukewarm in their attitudes and approach to the required accuracy changes in valuation practice. Ojo (2004) further cited that financial institutions have continuously complained about the accuracy and reliability of mortgage valuation figures supplied them, which they considered as underrepresenting the values of such foreclosed collateral securities. With this, there is no doubt that the property investing public, faced with continuously unreliable estimates, may decide to dump the services of estate surveyors and valuers in favour of services from other consultants such as the Accountants, Financial Analysts, Engineers or Quantity Surveyors who, they think may be able to provide more realistic and reliable estimates. The consequences of continuous and unchecked inaccuracy and inconsistency include adverse influence on the relevance and credibility of the Valuer (see Aluko (2004)). This will expose not only the Valuer to ridicule but also the profession. THE METHODOLOGY A survey/questionnaire research method was employed for this study. The sample for the study comprises all registered Estate Surveyors and Valuers and loan officers in all the licensed Commercial Banks in Osogbo and Ile-Ife both in Osun State. Field survey revealed 25 firms of Estate Surveyors and Valuers and also 22 licensed Commercial Banks in the study area. Two (2) different sets of closed ended questionnaires were 1088

Mortgage investment distributed to the study sample. Type A questionnaire was administered on Estate Surveyors and Valuers to gather data on the method(s) of valuation often used and awareness/understanding of contemporary models while Type B questionnaire was administered on officers in credit department of the banks to elicit information on the performance of mortgaged properties and their perception of the estate valuers work. A total of 47 questionnaires were administered to the study sample. Of these, 42 (23 for Estate Surveyors and Valuers) and (19 for Commercial Banks) questionnaires were returned and analyzed, representing 89% response rate. Both descriptive and inferential statistics such as: frequencies, chart, likert rating scale, mean score and regression analysis were used to analyze the data collected. FINDINGS AND DISCUSSION Table 1 shows the qualification of the respondents. In Table 1, 73.9% of the respondents are registered Estate Surveyors and Valuers. This category was considered for further analysis. This was to ensure that the views of only those qualified to assess property values according to Decree No 24 of 1975 were considered. Table 1 Educational and Professional Qualification of the respondents Qualification Frequency Percent Cumulative Percent HND/Bsc only 6 26.1 26.1 HND/Bsc with ANIVS + RSV* 15 65.2 91.3 MSC with ANIVS + RSV* 2 8.7 100.0 Total 23 100.0 * Registered Estate Surveyors and Valuers (15 + 2 = 17) Table 2 Method of Valuation often adopted for Mortgage Purposes Method(s) No. of respondents Percentage no. of respondents (n = 17) Ranking Cost 8 47.07 1 Cost + Comparison 3 17.65 2 Comparison 2 11.76 3 Cost + Investment 1 5.88 4 Investment 1 5.88 4 Investment + Comparison + Cost 1 5.88 4 Investment + Comparison 1 5.88 4 Discounted Cash Flow (DCF) 0 0.00 5 Others 0 0.00 5 Table 2 shows the methods of valuation used in practice for mortgage purposes. The most widely used is the Cost method only (47.07%) while 17.65% combined Cost and Comparison methods. Investment method is barely used while DCF and other contemporary methods are not used. This practice is contrary to the global practice and indeed the valuation theory which stipulates investment and comparison methods for mortgage purposes. Table 3 Awareness and Understanding of Contemporary Valuation Models Options Frequency Percent Cumulative Percent Awareness/understanding of the models Awareness of the models only Not aware of the models 03 06 08 17.65 35.29 47.06 17.65 64.71 100 Total 17 100 1089

Okorie et al. Variables Valuers figure provide adequate cover for loan Valuers do not carry out enough inspection/ investigation Valuers figure represent real market situation Valuers collude with client to inflate property value Strongly agreed (4) Agreed (3) Disagreed (2) Strongly disagreed (1) Mean Score Ranking 10 6 2 1 3.32 1 3 7 5 4 2.47 2 2 4 6 7 2.05 4 3 4 7 5 2.26 3 From table 3 above, only 17.65% of the responding Estate valuers have heard about and have understanding of the contemporary models. While 35.29% have only heard about the models, 47.06% have not heard about the contemporary valuation models. This indicates that majority of the responding Estate valuers were neither aware nor have understanding of the contemporary models and this explains why they are not used. Table 4 Professional(s) responsible for Valuation of Landed Security for Banks Professionals Frequency Percent Cumulative Percent Accountants 3 15.8 15.8 Engineers 1 5.3 21.1 Estate Valuers 11 57.9 78.9 Quantity surveyors 4 21.1 100.0 Total 19 100.0 From table 4 above, 57.90% of the responding banks revealed that Estate Valuers are the professionals responsible for Valuation of Landed properties used as security for bank loans. This was followed by the Quantity Surveyors (21.1%), Accountants (15.8%) and Engineers (5.3%). The involvement of Quantity Surveyors, Accountants and Engineers is a contradiction of decree 24 of 1975 which empowered an Estate Valuer as the only professional that can determine the value of land and buildings. Table 5 Evaluation of Estate Valuer s Work From table 5, the highest weighted mean score (3.32) relates to adequacy of loan coverage by the Estate Valuers figure. Valuers do not carry out enough inspection/ investigation has 2.47 while valuers collude with client to inflate property value was the least rated by the responding banks having 2.26. Differences in values submitted by valuers valuing the same property were reported. The responses further revealed that although there have been cases of collateral property being sold below valuation, the amount realised was sufficient to cover the mortgaged debt, arrears of interest and cost of sale. One expects that property values appreciate overtime, a situation where collateral properties were sold below valuation questions the accuracy of valuations. Some of the respondents also claimed that there were instances where the reported physical features valued properties differ widely from their actual features. Figure 1 Clients satisfaction with the Estate Valuers performance 1090

Mortgage investment Figure 1 reveals that the general performance of the Estate Valuer is rated satisfactory. This is indicated by 63.16 % of the responding banks. While only 15.97 rated it very satisfactory, 21.05% viewed the Estate Valuer performance as being poor. A 21% poor rating suggests that there is need for improvement. Regression analysis Table 6: Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1.935 a.874.838.250.701 Durbin-Watson From table 6, the regression analysis results indicate a high positive correlation (0.935) between the variables. The last cell gives the Durbin Watson statistic (d) of 0.701 indicating the presence of some degree of positive autocorrelation. Table 7: Analysis Of Variance Model Sum of Squares Df Mean Square F Sig. 1 Regression 6.070 3 1.517 24.204.000 a Residual.878 14.063 Total 6.947 18 Table 8 presents the coefficients. Looking at the significance values of the individual β s, it is discovered that, of the four predictors only the second predictor significantly predict the dependent variable with t =3.049 and P= 0.009<0.05. Table 7 presents the overall significance of the coefficients (β s). The results indicate that the overall model is statistically significant [F (4, 14) = 24.204; P = 0.000< 0.05]. 1091

Okorie et al. Figure 1 reveals that the general performance of the Estate Valuer is rated satisfactory. This is indicated by 63.16 % of the responding banks. While only 15.97 rated it very satisfactory, 21.05% viewed the Estate Valuer performance as being poor. A 21% poor rating suggests that there is need for improvement. Regression analysis Table 6: Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1.935 a.874.838.250.701 Durbin-Watson From table 6, the regression analysis results indicate a high positive correlation (0.935) between the variables. The last cell gives the Durbin Watson statistic (d) of 0.701 indicating the presence of some degree of positive autocorrelation. Table 7: Analysis Of Variance Model Sum of Squares Df Mean Square F Sig. 1 Regression 6.070 3 1.517 24.204.000 a Residual.878 14.063 Total 6.947 18 Table 8 presents the coefficients. Looking at the significance values of the individual β s, it is discovered that, of the four predictors only the second predictor significantly predict the dependent variable with t =3.049 and P= 0.009<0.05. Model Table 7 presents the overall significance of the coefficients (β s). The results indicate that the overall model is statistically significant [F (4, 14) = 24.204; P = 0.000< 0.05]. Table 8: Coefficients Unstandardized Coefficients B Std. Error Standardized Coefficients Beta 1(Constant).789.254 3.108.008 Valuer's figure provides adequate cover for loan Valuer's do not carry out enough investigation/inspection Valuer's figure represent real market situation Valuers collude with client to inflate property value t Sig. -.162.141 -.231-1.145.272.640.210 1.051 3.049.009 -.177.149 -.292-1.186.255.210.181.353 1.161.265 1092

Mortgage investment CONCLUSION AND RECOMMENDATION This study has evaluated the activities of Estate Valuer in mortgage investment in Osun state. The study has revealed that majority of the Estate Valuers often adopt cost method in valuation for mortgage purposes. The dominance of cost method and indeed conventional methods despite their limitation questions the sophistication and skill of the responding valuers. The clients perspective that Valuers do not carry out enough inspection/ investigation as well as 21% poor rating of the Estate Valuers performance is definitely unhealthy for the profession. In the face of observed competition with other professionals, the estate surveyors cannot afford to be found negligent in their work. It is therefore recommended that Estate Valuers should ensure they carryout adequate inspection and report properties features correctly as this will enhance the quality of services rendered to their clients. Also, the study revealed that most of the sampled Estate Valuers were either not aware of or understood the contemporary valuation models hence were not being used at all. The Nigerian Institution of Estate Surveyors and Valuers and the Estate Surveyors and Valuers Registration Board of Nigeria are urged to organize a mandatory educational enlightenment programmes to that effect. This will assist in keeping Estate Valuers abreast with the global trends in valuation practices for overall improvement in satisfying their changing clients expectations. REFERENCES Ajayi, C. A. (1990). An Analysis of Default Factors in Residential Mortgage of the Federal Mortgage Bank of Nigeria and Oyo State Property Development Corporation. Ph.D. Thesis, Department of Estate management, Obafemi Awolowo University, Ile-Ife. Ajayi, C. A. (1994). Conventional Versus Contemporary Valuation Approaches. Paper presented at the Annual Guest Lecture of Osun State branch of the Nigerian Institution of Estate Surveyors and Valuers. Ajayi, C. A. (2009). International Standards as they apply to the use of the Investment Method of Valuation and Mortgage Valuation. The Estate Surveyors and Valuers, Journal of the Nigerian Institution of Estate Surveyors and Valuers 32 (1), 1-17. Akomolede, K. (2004). Business Valuation: the Practice versus the Theories and the Way Forward. Paper presented at the Continuing Professional Development Workshop organized by the Nigerian Institution of Estate Surveyors and Valuers held in Lagos, Kaduna and Enugu. Alico, (1993). Appraising Machinery and Equipment. McGraw Hill Publishing Company, New York. Aiyedun, (2009). Reliability and consistency of the investment method of valuation. Unpublished PHD dissertation. Covenant University, Ota, Nigeria Babawale, G. K. (2006). The Growing Concern over Valuation Accuracy in Nigeria. Journal of Land Use and Development Studies, 2 (1). Barbu, D. and Gramescu, A. M. (2009), Application of Modern Methods in Real Estate Valuations. Paper presented at Eres Conference Stockholm. Baum, A. E. and Macgregor, B. D. (1992). The Initial yield revealed: Explicit Valuations and the future Investment. Journal of Property Valuation and Investment, 10, 709 726. 1093

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