Last week I started to explain why it’s important for property investors to understand the valuation process. You can read it here.
Today I’ll explain the role that sales evidence plays in the valuation process, some of the challenges faced by valuers and how investors can get the most out of their valuations.
There is a saying you often hear in real estate circles that a property is only worth what someone is willing to pay for it.
But if the property hasn’t sold and isn’t even on the market, how does a valuer determine its value?
Just like a crime scene investigator, a valuer must examine the evidence.
Specifically, a valuer will look at recent sales of comparable properties in comparable locations.
By using the information uncovered during the inspection and comparing the target property to similar properties that have sold, the valuer can determine a valuation.
Of course, the more similarities there are between the target property and those used for comparison, the more accurate the valuation will ultimately be.
At least 3 properties will typically be used as sales evidence and these properties must have sold recently, say within the last 6 months.
However, depending on the state of the market and how rapidly it is changing, valuers may choose to only rely on sales that have occurred within the last 3 months.
With the analysis of sales evidence complete, the valuer will compile a report outlining the properties that were used for comparison and how these properties differ from the target property.
The report, specifying the valuation figure, will be supplied to the person that requested the valuation.
If the valuation was commissioned by a lender for a loan application, the borrower may not be given a copy of the report.
The borrower can however ask the lender for the valuation figure.
One of the major challenges facing valuers is performing their role under immense time and cost pressures.
Valuation fees are typically quite low and this means that valuers can’t always invest the amount of time they would like into each valuation.
Some people describe the valuation process as a production line.
There are also legal pressures facing valuers. If a borrower defaults on a loan and the sale of the repossessed property fetches less than it was valued for, the valuer could potentially be sued by the lender.
Although this is a rare occurrence, many people believe the threat of legal action causes valuers to be overly conservative.
Examples have shown that different valuers can provide very different valuations for the same property.
Why is it valuable for property investors to understand the valuation process?
There are a few reasons…..
Firstly, understanding the factors that determine a property’s value can help you to spot a bargain and avoid overpaying for a property.
Secondly, having knowledge of the process can help ensure you get favourable valuations on your new purchases or existing properties.
Providing the valuer with information relating to relevant sales evidence can help you make a strong case for a higher valuation.
Pointing out positive characteristics about the property, which might not be obvious to the valuer, can also work in your favour.
It’s important to remember however that valuers are experts in their field, so you don’t want to patronise them.
But if you have information that may save them time, most valuers would be willing to look at it.