Valuations are an essential aspect of the property investment game, with the potential to either help your portfolio prosper or stop it dead in its tracks.
Financing a new purchase or restructuring or refinancing your existing debt are generally the main reasons for a property investor to have their assets valued.
Because the result of independent valuations can be so critical to your success as a property investor, it’s important that you understand the following five elements of the valuation process…
1. It’s not an exact science
Valuers are only human; therefore the determinations they make as to the fair market value of a property will be somewhat subjective in nature.
Then there’s also the prospect of the valuer being legally liable if they place too high a price on the property, and the bank subsequently loses money on the loan.
Many in the property industry believe this threat to the valuer causes them to be conservative with their estimates.
In today's hot property market, where prices are rising week after week, we are occasionally finding that valuers are a little bit conservative and out of touch and meaning that valuations are coming in a little bit lower than the contract price.
Now this doesn't happen often and happens very rarely at auction, but it's something we will now close with triple about and it's important for them to have a financial buffer to cover the small difference if it arises.
2. It’s not a real estate appraisal
Real estate agents can be notoriously bullish when it comes to appraising property because they want to secure the listing to sell your property and they know they’re competing against other agents for your business.
They’re also well aware that homeowners and property investors alike, want to achieve a good price for their dwelling.
So although most agents are very professional, they can alter their estimates upwards to meet your expectations.
This is in contrast to independent valuations, performed by valuers without any vested interests.
They are tasked with one duty only – valuing the property in question.
And importantly, the end value they attribute to the property makes no difference as to how much they get paid.
3. Not all valuations are created equal
We often talk about valuations like there’s only one generic process undertaken by every valuer, however, this is not the case.
But as a property investor, you need to be aware that how the valuation is carried out can have a direct influence on the end outcome.
Full valuations are, as the name implies, the most comprehensive and involve a complete internal and external inspection of the premises, as well as researching comparable sales and the overall local property market.
Restricted valuations; often referred to as “kerbside” or “drive-by” valuations, involve market research as well as an external inspection of the property.
You can see why it might be problematic for the valuer to never set foot inside your property before making their assessment.
A Desktop valuation or Electronic Valuer Review (EVR) is where a valuer uses statistical data, along with market analysis of local and comparable sales to determine their estimate, all from the comfort of their office chair.
In other words, they never visit the property in question at all.
For property investors, particularly those who may have made extensive internal improvements to add value to their property, a full valuation is essential in order to get a more accurate reflection of the market price.
4. Comparable sales heavily relied on
One of the main forms of data a valuer consults to determine their estimate for your property is comparable sales.
That is recent sales of dwellings close to your property and similar in type and size.
Comparable sales can sometimes be difficult to obtain in remote areas or for buildings with unique features and styling, so this can make it trickier for valuers to come up with figures.
In other words, the less comparable stock there is to use as a yardstick, the more likely valuers will be to rely on their own subjective interpretation of what your property is worth.
5. You can be a part of the process
Most property investors are not aware that they can actually assist the valuer in their assessment of your premises.
You can also be present throughout the valuation to answer any questions they might have, with all information about the property close at hand.
While you don’t want to appear to be tampering with, or trying to influence the independent process, it doesn’t hurt to give valuers any information that might be pertinent to their judgment, such as improvements undertaken since purchase.
Getting the best valuation outcome
While we may not always get the result we want from an independent valuation, property investors can be proactive when it comes to achieving the best potential outcome by:
- Providing your own list of well-researched comparable sales – a valuer may or may not use this information.
- Obtain your own valuation and request a review if you're not happy with the figure provided by the bank-appointed valuer.
- Ask to see the valuation report so you know how they’ve worked out the price for your property and can read any additional comments made.
- Do your own research and have a thorough understanding of the local property market.
Remember, nothing gives you more power in the property investment game than well-rounded knowledge.
