What is the best way to value a property?
In my mind, there are many different ways to determine a property’s true value.
There are also a few different types of people that you can turn to for a valuation of your property.
The most common are Valuers and, as an investor myself, I know a valuer can make or break a property purchase.
After all, who hasn’t received a bad valuation at some stage and if you haven’t yet, I suggest that you likely will at some stage.
So understanding the different ways in which a property can be valued, can help you better make sense of the outcome.
More importantly, it can give you back a level of control and avoid rushing into any rash decisions.
Here are my thoughts:
Historic valuers
The Historic valuer has a method of assessing your property's worth based on comparable sales over a period of time.
An example of a historic valuer is licenced valuers that are employed by banks and other financial institutions.
As a result, their primary concern is protecting their employers’ best interests NOT YOURS and as a result, can often be very conservative.
They take more of a methodical, evidence-based approach.
They have no vested interest in what the property may be worth past today and ignore any market forecasts or predictions on what it could be worth.
When valuing a property, they will only consider properties that have sold within a small geographic radius and within the months prior to the subject property.
This often creates a lag in a market that is rapidly rising, as it usually takes a while to hit the data portals once a property has settled.
This means the historic valuer may assess sales up to 6 months earlier in what may have been a very different market.
Therefore, we often see a mismatch and lower valuations, as values are not keeping pace with the current market trends.
I know this can be a disappointing and distressing outcome for investors, but don’t let a valuer's opinion put you off an investment-grade property.
Present day valuers
This can be a really great way of estimating what a property’s true value is, as you are dealing with the most up-to-date and recent sales.
The best Present-Day Valuers are local professional agents, both Buyers and Sales Agents, that specialise in a certain area or location.
They can tell you what the property sold for last week and even what a property may have sold for at Auction that very day.
It takes the data lag out of the equation, as they have access to the most up-to-date sales.
A professional agent will also be able to assist with current stock levels and buyer enquiries for different types of properties.
The only issue is that they may interpret some of the data for their own personal interests, ie to get you to sell.
If you can find someone independent and that you trust to work in your best interests, then this type of valuation can often be the most accurate.
Future valuers
This is arguably the most relevant type of valuer…. because it is YOU!
As the saying goes, “Beauty is in the eye of the beholder”, so too may be the value of your property.
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At the end of the day, your opinion on the perceived value is no less important than the Historic Valuer or the Present-Day Valuer.
Don’t be disheartened by others’ opinions and vested interests.
That is why understanding the location intimately and what the potential for capital growth will be is paramount.
As a professional investor and advisor, the price is the final thing I consider.
I would prefer to pay 5% more for a property receiving above-average returns, than getting a 5% discount for one with poor returns.
On a $1 million property, 5% could be as much as $50,000 more, but if it netted me an additional $200,000 or $300,000 in equity in the future, it would be worth it.
A bad valuation?
So, what do you do in the event you receive a bad valuation?
Firstly, don’t panic, this is part and parcel of being a property investor.
Perhaps a valuation from a certified valuer can be the most disappointing as it may be holding back the green light on a purchase or refinance.
As Buyer Agents, we occasionally come across this and we generally recommend three things you can try.
The first thing is to ask the finance broker if we can get a second opinion/valuation?
The next thing we would then do is provide as many up-to-date, comparable sales to support where we see value in the hope it may be overturned.
Unfortunately, valuers can be stubborn and, most of the time, you will likely not get the outcome you are searching for.
This is when you need to have a clear understanding of the Future Value and what the property may be worth to you in the longer term.
It may feel counterintuitive to make up for the shortfall between the valuation and the contract price.
But it may be necessary if this property is a top-performing, investment-grade property, if only for the short term.
You may be able to refinance at some stage following to release some equity and recover any ground lost.
That may be better than missing out on the opportunity altogether.
Out of the small number of properties our clients miss out on, almost all of them resell at or above what we had initially offered to pay anyway.
In summary
Some valuations may feel like they hold more weight if the desired outcome is so important.
But at the end of the day, there are many ways to value a property.
Historic Valuations are the method of choice by licenced valuers, who are data-driven and represent the banks' interests.
If you can find an independent, property professional who specialises in a market, their Present-Day Valuation can be the most accurate.
At the end of the day though, your opinion on future values may trump them all.
There may be some short-term pain and disappointment, but you need to overcome these obstacles as a successful property investor.
It may be a small price to pay for an investment-grade asset with wealth-producing rates of return.
