Property valuation is often seen as a moving target that depends on a number of factors, but as James Freudigmann explains, there are still some core guidelines that never change
There are often two market assessments that people refer to when talking about the value of a property - appraisal and valuation.
The appraisal is what a selling agent will provide to you. An appraisal is a market indication based on some comparable sales that the agent is aware of, it is not a valuation. If you rely on this and list your property for sale, you will nine times out of ten, find that this appraisal price is not an indication of real value.
A valuation is a calculated figure that includes an assessment of the land value and the improvements, taking into account the depreciation of the property since construction. It also includes sales comparison, construction costs, town planning commentary and a breakdown of living areas, outdoor areas and car areas.
Every day, I see listing prices very rarely in line with the market value of the property. Sellers start with a higher price to see if this can be achieved, then generally speaking the listing or asking price is reduced until there is an offer from a prospective purchaser. A selling agent’s appraisal is generally not an indication of real or market value. Real value or market value is the value of a property assuming that there is a willing buyer and willing seller in an arm’s length transaction. This figure is what is reflected in a valuation.
Risk ratings and your bank’s lending decision
Risk ratings are used as a benchmark for lending purposes, so that the bank can determine whether they consider the property to be appropriate security for the lending associated.
There are eight risk ratings that a valuer must assess and classify from low-risk (rating 1) through to high-risk (rating 5). The eight risk ratings are based on:
- environmental issues
- expected reduced value in the next 2-3 years
- market for the area
- market segment conditions
- volatility of the property
All of these provide a quick summary of the position and quality of your property in the marketplace. Properties with risk ratings of 4 or 5 are considered to be relatively poor security for banks. If your property gets a risk rating of 4 or 5, there is potential for the bank to limit lending or not lend at all.
So how do you protect your property from being assessed as high risk?
A simple coat of paint or landscaping generally won’t impact on the property’s risk rating. It all comes down to what property you buy and where that property is located.
For instance, if you buy on a main arterial road, you are going to get a risk rating of 4 or 5 due to the noise and traffic. If you buy a property that is $3 million in an area where most properties are $500,000, then you are likely to get a number of high risk ratings due to the volatility, limited market segment that the property appeals to and the potential for reduced value in the next few years. It is all about purchasing a calculated investment.
You are always going to struggle to get strong growth and low risk ratings if your property fronts a main road, backs onto a train line or is in the top 5% of the market due to the limited marketability, high vulnerability and volatility when markets move.
To ensure your risk ratings are assessed as low to medium, it is recommended to purchase property that is relatively in line with the remainder of the suburb. I’m not saying buy a vanilla, low-value property but I am saying don’t buy the property that sticks out like a sore thumb. Look for properties that are not out of the ordinary and are well located. Properties should be relatively in line with the rest of the market, with strong appeal to owner occupiers. Every suburb has good and bad areas as well as sought after addresses, so look for properties in close proximity to these areas. Big positives include being close to cafés, schools and transport.
When you are considering purchasing a property, the majority of people think more bedrooms = higher value. It’s a rational line of thinking given you can get a higher return renting by the room, so more rooms would suggest more renters.
Propell National Valuers takes a different view. A small house, let’s say approximately 100sqm, that has been converted into five or six bedrooms of about 2m x 3m, is likely to receive lesser demand in a sale than a property with three bedrooms of a decent size.
When it comes to talking about the number of bedrooms the mentality needs to go from “more is better” to “bigger is better”. People are searching for good sized bedrooms with built-in robes and the space to put in a double bed and bedside tables without having to squeeze past the door. Larger bedrooms make a house feel bigger and more prestigious. Tiny bedrooms can make a house feel cluttered and it can actually do more harm than good.
We’re not saying that people aren’t searching for four bedroom homes over those with three bedrooms, because there are plenty of families searching for four bedroom homes; however buyer behaviour shows us that having good sized bedrooms is generally in greater demand than having more.
If you’re planning to add on a bedroom or convert a current room into a bedroom, you need to consider what number of bedrooms a prospective purchaser will be looking for. If your answer is three or four, then don’t create five small bedrooms! Instead, ensure your three or four bedrooms are well sized and equipped with built-in robes and storage.
Adding features to lift value
Adding features to a property can either add value or detract from the property. Even if a feature is likely to add value, you may need to consider whether it will be equal to, or more than, the cost of the feature.
From a valuation and growth point of view, don’t make your property too unique where you limit your future marketability. Modifying a property to suit your lifestyle is fine and of course, is a great advantage to owning a property over renting, but try to ensure that you are not creating something that is exclusive or doesn’t appeal to the majority of the market. Doing so means you are likely to limit the future marketability and saleability of the property.
A common question I’m asked is “what features will add value and what will detract?” This is not an easy question to answer as it really is market dependent due to differing demographics. However one example is an in-ground pool.
Generally speaking the cost to install a pool can be quite significant and the majority of the time, the added value is less than the cost of installation. Many investors purchase units in large complexes with common facilities including pools, lifts, gyms, saunas and spas, thinking this makes the unit more valuable.
It may come as a surprise to learn that these items for an investor are of little advantage as they pay the cost to maintain them when very rarely, tenants use them. A unit with these facilities priced the same as one without is likely to sell faster, however these items do not add a significant value to the unit itself.
Chandeliers, led lighting, seabus systems and other additional features can be very expensive items. These may add value but again, generally not as much as the cost.
There are also features that can actually detract from the value of a property. For example, a mural painted on a wall of the house that appeals to you but not to the general market will lower your property’s value.
Prospective purchasers make an allowance for the cost to paint over it or have it removed. The same applies with brightly painted feature walls (greens, reds, blues) or properties that have multi-coloured walls throughout. Just as with risk ratings, it’s best if your property remains in line with the area’s general market to interest the majority of potential buyers.
Adding on a granny flat to add value
Granny flats are a detached second dwelling on a residential house site. There’s a trend emerging, particularly in New South Wales, for home owners to construct a granny flat to boost the cash flow of a property - turning it from a negatively geared investment into a positive cash flow property.
The style of granny flat is important to consider when it comes to adding value. One option is to construct a brand new building on a slab - this is the model Propell supports for our clients. It is slightly more expensive but it is quality construction that will stand the test of time. The second style is a kit home on stilts, constructed in under a month. This is slightly cheaper and has the advantage of being constructed quickly. Finally, there is the demountable or “crane in” style granny flat. These are the cheapest option and people generally liken these to shipping containers with windows or the traditional ‘donger’.
The big question is, if you are spending between $80,000 and $150,000 on a granny flat, what value is this going to add to your property?
When Propell National Valuers value a property, we assess the quality of construction of any dwelling. A demountable or ‘crane in’ style granny flat is not able to be included in a valuation due to the removable nature of the improvements. What this means is that even though it may cost you $80,000 to purchase the structure and get it on-site with plumbing, the valuer is unable to apportion any value to that structure. This may restrict your ability to borrow from the bank to fund the granny flat. It may improve your marketability; however it will not increase the value of your property.
If you build a granny flat, whether kit style or slab on ground construction, these do add value. It is difficult to say how much value they add because these can be built in a number of different circumstances, however generally speaking, the cost of construction for the quality slab-on-the-ground granny flat is reflected in the end valuation of the property. This means, provided you have a reasonably priced builder, the construction will create value in a valuation equal to, or greater than, the cost involved.
Through the eyes of a valuer
The phrase “first impressions count” is 100% true when it comes to having your property valued. If your property is looking rundown with an overgrown yard, peeling paint and rusted gutters, this is going to instantly give the valuer the impression that the property is not well maintained and is therefore not going to be a quality property.
Don’t forget, it isn’t just going to be the first thing the valuer sees; it’s also going to be the last. When they leave the property and turn around for that final look, what they see will potentially impact the valuation figure due to the overall marketability of the property. It is important to note here, the valuation figure is essentially that Valuer’s educated judgement supported by market evidence, so leaving a good impression can make a big difference.
Inside the dwelling, rooms full of furniture always make the space seem smaller. Have you ever walked into a display home that has heaps of furniture? They will always have simple furniture packages that make the rooms feel bigger than they really are.
Valuers do see beyond furniture and clutter, and we measure the rooms, however clutter still has an impact. Simplify rooms. If there are dishes piled high on the sink, put them in the dishwasher or make sure you wash them before the Valuer arrives.
Clear bench tops in kitchens to give a sense that they are larger than they are, put clothes in washing baskets and generally tidy up. If you have a lot of possessions, just stack them or conceal them so they don’t take up too much space. Consider a Valuer as you would any other friend you’d have over for dinner!
What are the things that add value?
There is no definitive list. Markets all around Australia reflect varying affluence, demographics, infrastructure, employment and so on; so what may add value to one property in inner Sydney may not add value in regional Queensland. That said, there are some items worth considering which have drawn a demand in general, and therefore, improve marketability and sales.
- A well landscaped front yard with a good fence will improve the marketability of a property - the photos will attract more people to attend open home inspections.
- Two of the biggest items that will add value to a property are a new kitchen and bathroom. Investors and owner occupiers repeatedly demand functionality and style in these rooms, and getting this right can help you sell your home faster.
- A covered outdoor area that flows from the living area can add value - people not only want to entertain in these areas, they want this space to be protected from the weather and become an extension to their general living area. Bi-fold doors, stacker doors and servery’s from the kitchen are other ways of adding value to your property, but beware, the cost of bi-fold or stacker doors can be quite expensive so ensure that your property is in an area where premium prices attract buyers.
- Storage is also highly sought after, so secure car accommodation with good storage is considered a premium. The majority of people have too many possessions to get into a small unit so if you can convert some car space into storage above the car or in front of it, this will help to increase the value of your property. Where possible (it may be harder for units in Sydney and Melbourne), create storage for suitcases, linen, garden equipment and so on. Built-in or walk-in wardrobes are also in high demand, so it would be a wise investment to install these if your home doesn’t already have them. Just make sure the room will not feel too small post installation.
- Neutral and earthy colours are essential to ensure you have the best marketability. Feature walls can detract from a property if it is not a colour that most people enjoy. Bright reds, blues and greens should not be included in the property even as a feature wall as this limits the marketability and can put some buyers off completely.
James Freudigmann is Manager Propell National Buyers Advocates. Visit propellvaluers.com.au for more information