Firstly, we should differentiate between a valuation and an appraisal. A valuation can only be prepared by a registered valuer whereas an appraisal can be done by a real estate agent.
Financial institutions will always require a valuation to be undertaken. Banks want an independent and unbiased assessment of the property’s actual worth so that they can confirm that the property represents adequate security for any loan being considered.
Some people have nicknamed valuers – God because they have such power over your investing. If they value your property significantly less than your estimated valuation then that may serious effect your property purchasing ability.
Even though a three or four year course is required to become a registered valuer, it is not an exact science. By that I mean that two or three valuers could be asked to value the same property and all their valuations would be different. Part of the reason for this depends upon the properties that they have used for comparison purposes.
The normal criteria for establishing a price is what price could be realistically achieved if the property was given reasonable marketing and sold to a willing buyer and a willing seller in an arms-length transaction within a ninety day period.
So how do valuers value property?
We will restrict our discussion to residential property because commercial property has a few different ways of valuing that property and is therefore a full topic in its own right. Valuers will use one or two methods to determine the value of a residential property either a direct comparison method or the summation method.
We will first look at the direct comparison method whereby the valuer will look at comparing your property with recent sales, normally no more than six months old and will not look at what is currently on the market. Not taking into account properties that are currently listed for sale is understandable as you may have a house listed for sale at $500,000 and it may finally sell for $450,000 so that would make the data unreliable.
Prior to visiting the property to be valued, the valuer is likely to have done some homework into the market in that area and the history of the subject property and whether there are any restrictions such as zoning, easements or covenants on the property which could impact the future use of the property. The valuer may also use software and market data to review sales of similar properties in the last six months.
The valuer will then visit the property for a ‘walk through’ which is likely to take about 15 minutes. During this time the valuer will be noting such things as the number and size of rooms, the layout and design functions, the amount of natural light and the age and quality of the finishes, fixture and fittings for example stone bench tops, quality of the carpet. Externally, the valuer will look at the architectural style of the property, the age and condition of the property, land size, the shape of the property, the aspect, topography and layout of the block and any improvements such as pergola, pool and sheds.
After the ‘walk through’ of the property, the valuer will look at the neighbourhood, location of schools, public transport, shops and other amenities also neighbouring properties and do a kerb side inspection of any other properties identified as possible comparisons.
Valuation reports will normally show properties considered superior to the subject property and those considered inferior and your property is then placed somewhere in between those properties. The valuer is aiming to achieve a like for like between the properties or as much as possible.
The second method for residential properties –the summation method, involved adding the value of the land and the value of any improvements such as the house, pool, pergola and garage to arrive at a value for the property.
Combining these two methods results in a valuation range.
Is there anything that I can do to influence the valuation?
The best advice that we can offer here is to present the property in the best light possible. Make sure that the exterior of the property is free of rubbish, the lawns mowed the garden neat and the interior of the house is neat and tidy. We understand that this is not always possibly particularly if the property is tenanted however we have heard of owners seeking a good valuation who have gone to some extremes. The initial valuation was well below what the owner knew the property was worth so he organised a second valuation. The property was rented to university students so was not what you would call neat and tidy. The owner arranged for the university students to have a long weekend away, at the owner’s expense. As soon as they had left, the owner had a professional company come in and pack up all the furniture of the tenants and take them off site and then furniture selected by a stylist was placed in the property. The valuer came through later that day and the property was valued at about $40,000 higher than the previous valuation. The styling furniture was removed, the tenants furniture replaced, the tenants had a nice weekend away and the owner was over $30,000 over the prior valuation after allowing for all costs.
This is an extreme example but valuers are influenced by the internal and external condition of a property.
Another things that I have successfully done to achieve my estimated valuation is to do some of the homework for the valuer. Although I have access to paid subscription sites that provide information on recent sales in the area, there are now free site that provide similar information. The secret here is to know what the valuer is likely to be looking for and to present the information to him in a neat format. You may include details of any recent renovations, new carpet, new driveway etc. At the time of presenting my information to the valuer, I normally say something like this, ‘I know that you will need to do your own research but I have put together a few recent sales that may be helpful to you’.
If you have been watching the local market closely, you may be aware of very recent sales that may not show on any of the reports that the valuer has available to them. Some sales can take between six weeks and three months to show on some reports depending upon the State.
Valuation is just one of over 2000 terms that we have included in our book, Its Time: A-Z of Property and Financial Terms, available in good libraries, bookshops like Readings or from our website.
Until next time, this is Muthu and Brian wishing you success as you build your pyramid of wealth.