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Dealing with incorrect valuation
Valuations are not an exact science, rather an educated interpretation of the characteristic of the property and market conditions at a given point in time. Often a valuer is challenged on how he/she arrived at the figure.

In most cases the point of difference will be the interpretation of market data. For example, on many occasions a vendor has based their own estimation of value based on the ‘asking prices’ in their neighbourhood. The valuer will only analyse actual sales of property where a transaction has actually occurred.

A common question received by valuers from property owners or prospective property owners is “What if I believe the bank’s valuation is incorrect?” A number of lenders, when extending mortgage funds, have drifted away from the use of full valuations and, in some cases, the figure they use may be based on a computer statistical model or a desktop assessment.

This is not a current market valuation, as described above. In fact our research indicates that there can be up to 10-20% of variance in what a valuer would assess the property to be worth based on a full inspection. Typically, lenders do this to save the borrower upfront costs which, on a $600,000 property, would equate to a saving of approximately $200 in valuer fees.

To determine this, ask your lender if a valuer actually inspected the property. Unless there is compelling market evidence of directly comparable sales that have not been picked up by the valuer’s research, then the valuer is unlikely to change his/her opinion of value. Given that most lenders expect the valuer to have inspected and completed their report within 48 hours of instruction, they may sometimes miss some vital evidence. If you are aware of a directly comparable property that has sold, supply it to your lender or the valuer at the time he/she inspects your property.

Why bother with valuation?
Valuations are used for various purposes. The most common basis for a valuation is for rating and taxing purposes, usually required every two years. This allows your local government to assess your council rates based on the value of the property. These figures are also used by state governments for land tax calculations.

In addition, banks and lenders require a valuation when a customer applies for mortgage finance. The lender will usually have an independent valuation carried out on the property to determine the value of their security equity in a property.

Nearly every lender in Australia instructs the valuer to assess the property using the definition outlined above. Another common misconception is that a valuation for bank purposes is discounted in some way. This is not the case.

Other forms of valuations include those used in property disputes such as matrimonial separation; insurance valuations; rental valuations when there is a dispute between landlord and tenants; and for resumption and compensation purposes when a government authority takes possession of a property.

Recently we are seeing more buyers and sellers of property privately engaging a valuer to assist them in making property decisions. Vendors are using the valuation as a decision-making tool, particularly if they have had wide-ranging variances in appraisals conducted by agents. They are then able to assess whether an offer made is genuine, above or below where it should be.

Alternatively, purchasers may also choose to engage a valuer to assist them when they are making an offer. In these days of tight lending rules, many just want the assurance that the price they pay will be supported by the bank when they have it valued. If you get a firm opinion from a valuer you should consider it, as it will be based on a close and educated knowledge of the local market.

Valuing your valuer
In Australia, the term valuer is used to describe an appropriately qualified and licensed person who can undertake a valuation. Generally speaking, a valuer can only become qualified after taking an appropriate tertiary qualification (usually a four-year Bachelor Degree in Property); undertaking two years of fully supervised experience; and sitting an oral exam in front of a group of peers. In the states of NSW, Queensland, South Australia and Western Australia, the state government also licenses the activities of valuers.
In conducting a valuation, the valuer interprets a range of data, mainly based on market evidence, as well as taking into consideration a range of attributes unique to the property. These may include:

• Locational factors – is the property on a busy street?
• Does it have good vehicular access?
• Are the buildings in good condition, and if not how much will need to be spent on bringing them up to an acceptable standard?
• Is the property designed well?
• What level of accommodation does it offer?
• What is the standard of presentation and fit out?
• Other factors may relate to the property’s zoning and use. Is this the highest and best use of the land?

Valuation misconceptions
In the context of valuations, it is important to deal with some common misconceptions:
• Cost does not equal value. In the example of a new construction the combined sum of the land and buildings does not necessarily equal value. Many people overcapitalise in real estate and learn a hard lesson when they try to sell their property.
• Asking/selling price does not necessarily equal value. Many sellers pitch the price of their property above the market hoping to sell at a premium. When a real estate agent gives you an estimation of the worth of your property it is called an appraisal. This is distinctly different from a professional valuation because it not only takes into account comparable sales, but also undertakes an analysis of the features of the property and its attributes – providing a far more detailed analysis of the subject property.
• The market is constantly changing, and for a valuation to be relied on it must be no more than three months old.

10. “Buying interstate is a great way to diversify”

Buying properties interstate can mitigate the risk of some local factors, but investors should be aware that all properties are affected by the macro economy. Interest rates, inflation, taxes and large international events can all have significant impacts on property prices in any location.

This was evident in the wake of the Global Financial Crisis when property prices across Australia were negatively impacted. It is also important to consider that markets can vary within states and investing in different cities or towns can provide diversification. For example the resources boom in Queensland has seen many mining towns outperform Brisbane’s residential property market in recent years, so looking further afield in your own state could be worth considering.

9. “Investors should only buy for capital growth”

While capital growth should always be considered in line with your wealth creation strategy, rental yields for a property should never be overlooked. Strong rental yields produce a greater cash flow, and therefore allow investors to pay off mortgages sooner and have access to cash flow for future investments.

In general, areas with higher capital growth are based in metropolitan areas, are more expensive than their regional counterparts and generate lower rental returns. A property in an area with strong rental yields can still deliver a good return on investment when property prices are stagnant or falling. The deciding factor of which one is of greater importance should be based upon your individualinvestment strategy and current requirements.

8. “Market Value is the same as sale price”

Market value is an estimate of the price a property would likely attract in a rational and competitive market place. Sale price is the actual figure a property is sold for. As an example someone sells a property for $500,000 (sale price) when near identical properties have been valued between $490,000 and $510,000 (market value) in the same area.

The reason for a disparity between a valuation and sale price could result from human factors relating to the sale. A buyer may feel a personal connection with a property and happily pay above market value, or alternatively, a buyer may have personal circumstances which compel them to sell quickly and accept an offer below market value.

7. “Commercial property is riskier than residential property”

This is a broad generalisation which should not be a guiding principal for investors. A well located retail showroom with a long lease and annualised rental increase could be a very sound investment. While the property may not see an increase in value during a downturn, the long term lease will help to ensure reasonable returns during this period.

Conversely, the marketers of a new residential unit development in an inner city area may claim to offer a risk free investment.  However a large amount of units may be in development in the area and could quickly lead to an oversupply.  Commercial and residential properties should be evaluated on their own merits.

6. “Property prices never go backwards”

This view is often held by young investors who have only experienced strong market conditions.

Many parts of Australia were fortunate during the 2000’s to experience an unprecedented boom in property prices that seemed like it might continue forever. While in the long run property markets tend to go forward due to scarcity of land and increasing population, they tend to be cyclical in nature and often go backwards in the interim as experienced in late 2008 into 2010.

Economic factors both domestically and internationally can have a rapid and damaging impact on local property markets. A severe economic downturn in China, for instance, could see a decrease in demand for Australia’s resources. In some mining communities that would likely result in a decrease in property prices and rental yields.

5. “The valuation doesn’t reflect my home’s presentation”

Buyers have very personal preferences when it comes to interior design. It is very common for property owners to spend $20,000 painting the inside of their home in bright, bold colours expecting their home to increase in value by at least the same amount.

While the property owner may love their new colour scheme, buyers may not share their enthusiasm. For this reason valuers factor in design trends when valuing a property, and most will agree that neutral colours present best. Property owners are also urged to stay away from exotic furnishings for the purposes of adding value to their property, as this too is subjective.