Reviewing a deficient mortgage valuation report
A bank's credit team asks your firm to review another registered valuer's report submitted for a mortgage of a 640 sq m office unit on the third floor of a building in Jaipur. The report states 'fair market value: approximately ₹12.50 crore (negotiable)'. The report is dated 12 August but no valuation date is given, and inspection is described as 'done by field assistant'. The property is described as freehold although the title document is a 30-year lease dated 2010. The building's occupancy certificate is for residential use, while the unit is in commercial use; the terrace above the unit has been covered with a tin shed and let to a telecom operator. Comparables are described only as 'three shops in the same market at ₹1.4 lakh per sq ft' with no address, area or date. The fee is stated as 0.15% of the loan sanctioned, payable on disbursement, and a disclaimer states that the valuer 'accepts no liability for any loss arising from use of this report'.
1. Identify the deficiencies by reference to the applicable Indian Valuation Standards and the code of conduct, and explain why each matters.
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No valuation date. Value is date-specific; without it the figure cannot be tested against the market on any day. Both the valuation date and the inspection date are mandatory report content under IVS 101 and IVS 103.
**'Approximately ₹12.50 crore (negotiable)'. ** This is neither a defined basis of value nor a determinate figure. The report must state a single value on a defined basis (market value as defined in IVS 104), with any rounding convention disclosed. 'Negotiable' confuses price expectation with value.
Freehold stated for a leasehold title. A factual error about tenure, and the single largest driver of overstatement here.
Ignoring the use and the terrace structure. The occupancy certificate is residential while the unit is used commercially, and the terrace tin shed and telecom letting are unauthorised. Value must not be attributed to illegal structures.
Inspection by a field assistant. The valuer must inspect or expressly disclose that he has not; adopting an unseen inspection as one's own is a failure of the investigation duty under IVS 102.
Unverifiable comparables. No address, area, date or source, and no adjustment grid, so the evidence cannot be tested against IVS 105.
Contingent fee. A fee set as a percentage of the loan sanctioned, payable on disbursement, gives the valuer a direct interest in a high figure and a completed transaction. It offends independence and the Model Code of Conduct and must be disclosed even where permitted.
Blanket disclaimer. A valuer cannot contract out of professional responsibility; the clause is inconsistent with IVS 103 and undermines the report's purpose.
Also missing: scope of work, purpose, methodology, assumptions and limiting conditions, statement of independence, reliance clause, registration number and signature.
2. Explain the valuation consequences of the freehold misdescription and the unauthorised use and terrace structure, and what the report must say about them.
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Freehold versus leasehold. A 30-year lease from 2010 leaves about 15 years unexpired. The lessee's interest is the present value of net rentals for the residue plus whatever reversion the lease gives it; if the building vests in the lessor without compensation, the reversion is nil. A leasehold interest of this length typically supports 40-60% of freehold value, and materially less if the lease restricts transfer or requires the lessor's consent to mortgage. The report must value the interest actually held, quote the lease's expiry date and the vesting, consent and forfeiture clauses, and not describe the tenure loosely. If the ₹12.50 crore figure was arrived at as freehold, it is likely overstated by a large multiple and the bank's security cover is illusory.
Use and structure. An occupancy certificate for residential use while the unit trades as commercial means the use is unauthorised. Value must first be stated 'as is', with the discrepancy disclosed and the risk of penal action, sealing or refusal of regularisation quantified. Alternatively value 'subject to regularisation', deducting compounding charges, penalty, professional fees and the delay involved, and stating it as an explicit assumption with a clear caveat that it is not a certainty. The tin shed on the terrace and the telecom tenancy are unauthorised structures generating income from a user that is itself irregular; the structure should be excluded from built-up area, the tenancy disclosed, and any income from it treated as at-risk rather than capitalised into the value. None of this may be buried in a footnote.
3. What should your firm advise the bank, given that it is reviewing and not revaluing?
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Do not endorse the figure. A review cannot convert a defective report into a reliable one. Your firm should issue a review memorandum addressed to the bank that sets out the non-compliances with reference to IVS 101, 102, 103 and 105 and the Model Code of Conduct, the questions the report fails to answer, and the specific risks it conceals - principally the tenure gap and the unauthorised use.
Decline to countersign or adopt the valuation. Countersigning would associate your firm with assertions it has not verified; adopting the figure without independent investigation would breach the same duties the original valuer has breached. If the bank requires a usable valuation, a fresh engagement is needed, with a defined scope, an inspection by the signing valuer, title and lease verification, and a market approach built on verifiable transactions.
State the limits of the review. Say plainly that it is a desk review of the report as submitted, that no site inspection, title search or independent market enquiry has been carried out, and that the review opinion is confined to standards compliance and internal consistency. Confirm that no confidential client information of the original valuer has been used.
Practical advice to the credit team. The report should not form the basis of credit sanction, since the security value is unverified and the tenure is misdescribed. Recommend a valuation by a valuer on the bank's panel, disbursement conditional on a registered lease with the lessor's consent to mortgage, evidence of use permission or a decision to value the unit as unauthorised, and a loan-to-value limit applied to the leasehold interest with a tenor comfortably inside the unexpired term. Record the review in writing and keep it on file, because the bank's own audit trail will be examined if the account sours.