APPROPRIATENESS OF COST METHOD OF VALUATION ON INCOME PRODUCING PROPERTIES USED FOR BANKSECURITIES IN ABUJA, NIGERIA

Abstract

One of the requirements of real estate used as security for bank loan is that valuation must be carried out to determine the open market value of the said property. This study investigated the appropriateness of Cost Method of Valuation in the pricing of income producing real properties used as securities for bank loan in Abuja, Nigeria. A survey research design was employed for the study. The target populations are the firms of registered Estate Surveyors and Valuers in Wuse district of Abuja and the licensed Commercial Banks in Wuse district of Abuja. Two different sets of close ended questionnaires were served on 56 Estate Valuers and loan officers in the 18 commercial Banks (respectively) in Wuse district of Abuja. Data collected were analyzed using Descriptive Statistics (Frequency Tables and Weighted mean score) and Inferential Statistics (chisquare, regression analysis and t-test statistics which test for difference between two populations mean). Findings revealed among other things 30.56% usage of Cost Method of valuation for income producing properties used as security for bank loan in Abuja; valuation of income producing properties using Cost Method explained at least 68.9% of the variance in the prices of such collaterals when sold on foreclosure (Adjusted R Square = .645); the mean estimated values of properties assessed using the Cost Method were higher than the price realised on such properties at the time of foreclosure. This however, was not the case with the properties that were assessed using the investment method of valuation. The study recommended that the use of Cost method of valuation for income producing properties should be discouraged and that the Nigerian Institution of Estate Surveyors and Valuers (NIESV) and the Estate Surveyors and Valuers Registration Board of Nigeria (ESVARBON) should establish a reliable property data bank where the Estate Surveyors and Valuers can obtain information for investment method valuation.